10 investment actions for DB plans in 2017

Published
  • December 07 2016, 12:52pm EST

10 investment actions for DB plans in 2017

The investment world has become increasingly complex. Pension plan investment committees have access to more ideas than they have time to consider, let alone implement. This complexity can be daunting, but complacency is not an option. Heightened risk throughout the world and evolving U.S. pension regulations have made it more challenging for pension plans to pay current and future beneficiaries.

So what can you do to make your time commitment more meaningful to long-term plan success?

Below are top 10 investment actions for 2017. A variety of operational, strategic and portfolio management goals will help plan sponsors best utilize your limited resources to improve investment outcomes in 2017 and beyond.

1. Assess critical resources and fiduciary risk.

All investment committees must prioritize their activities. But not all investment committees are created the same; plans, staff, budgets and expertise vary drastically. Consider how your governance structure impacts your ability to focus on high-impact decisions, and identify areas where you may require additional support.

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2. Leverage technology and tools.

Technology should enable you to make important decisions more efficiently and conveniently.

3. Better align strategy and time horizon.

Whether the employer intends to terminate the plan, offload it to an insurer or manage it for the foreseeable future, it’s important to identify the goal and associated time horizon, risk and cash needed to achieve this goal. Strategic decisions greatly influence the portfolio you construct now, how that portfolio changes over time and, ultimately, the ability to achieve the goal itself.

4. Reduce nonstrategic activities such as short-term manager return monitoring.

It is easy to focus on manager performance because it’s tangible; every quarter, or even every month, we can attempt to gauge whether hiring and firing decisions paid off by looking at past returns. But there are many other areas that deserve our attention as well, some of which we believe will have a much larger impact than short-term excess returns. Reallocating time spent on manager return monitoring is a simple way to free up time to spend on more impactful ideas. Focus your monitoring activities relative to strategic goals..

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5. Define, evaluate and monitor key funding risks Investment committees, consultants, sponsors and actuaries must work together to achieve the long-term objective.

Together, we can gauge how current levels of risk and return, expected contributions and evolving pension liability regulations (such as mortality improvements, funding relief and rising PBGC premiums) may impact the plan’s long-term success. We can link these findings to your broader risk management plan and help you act decisively at the most opportune times.

6. Diversify traditional portfolio exposures into less macrosensitive markets.

A diversified portfolio can better withstand adverse market events such as capital market drawdowns and should reduce the volatility of contributions. Our research has identified diversified portfolios that can be constructed without significantly increasing required resources or oversight, elevating costs, or eroding expected returns. The path of returns can meaningfully affect the time and resources needed to accomplish your goals.

7. Assess and utilize all paths to implementation.

Better implementation helps reduce costs and prevents headaches down the road. Fees can potentially be saved via renegotiation with managers, by using smart beta approaches in areas where active management has become more limited and expensive, and by streamlining the investment program’s operational and administrative aspects. Every dollar saved through improved efficiency is one less required from contributions or portfolio returns.

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8. Improve the risk/return profile with options.

Straightforward derivative strategies may help your cash holdings avoid drag and maintain market exposure, reduce or eliminate tail risk or hedge your liability while freeing up additional assets to generate returns. Options can be yet another cost-effective way to take rewarded risks, reduce downside risks or avoid uncompensated risks altogether.

9. Be purposeful about timing interest rates.

For at least a decade, we have heard clients ask, “Why hedge interest rates if we know they are just going to go up?” While the reasons for or against hedging are often client-specific, hedging exposure is not a decision that should be taken lightly. Interest rate risk is, by far, the most significant risk for most pension plans, with its impact dominating that of active management decisions. Skillful market timing requires knowing that rates will go up, when and by how much they’ll increase, and if and how an increase differs from market forecasts.

10. Define how different environments impact your liability driven investment (LDI) portfolio.

As markets move, your motivations for the LDI portfolio and your desired mix of hedging instruments may change. In an environment where low interest rates are the new normal, it is worth considering the correlation of corporate bonds with the equity portfolio and the hedging efficiency that can be achieved via government bond exposure, both physical and synthetic, relative to corporate bonds.