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Pension Risk Strategy Summit Supplement Advertising Supplement PENSION RISK MANAGEMENT STRATEGIES Understanding All the Derisking Possibilities PS001_PI_20170612.pdf RunDate: 06/12/17 pi Pension Risk Strategies supp 8 x 10.875 Color: 4?C Advertising Supplement SPONSORS Fidelity Institutional Asset Management 900 Salem Street Smitheld, RI 02917 Daniel Tremblay Senior Vice President and Director of Institutional Fixed Income Solutions 603.791.6599 [email protected] www.institutional.delity.com MetLife 200 Park Avenue New York, NY 10166 Asif Mohamed Director, U.S. Pensions 212.578.8624 [email protected] www.metlife.com/pensions NISA Investment Advisors, LLC 101 South Hanley Road, Suite 1700 St. Louis, MO 63105 Gregory J. Yess Managing Director, Client Services 314.721.1900 [email protected] www.nisa.com Prudential Retirement 280 Trumbull Street Hartford, CT 06103 Scott Gaul, FSA Senior Vice President and Head of Distribution, Pension Risk Transfer 860.534.4263 [email protected] www.pensionrisk.prudential.com Schroders 7 Bryant Park New York, NY 10018-3706 Jennifer Horne, CFA Head of U.S. Institutional Clients 212.641.3800 [email protected] www.schroders.com/us This special advertising supplement is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc. 2 Pension Risk Management Strategies PS002_PI_20170612.pdf RunDate: 06/12/17 pi Pension Risk Strategies supp 8 x 10.875 Color: 4?C Advertising Supplement CONTENTS 4 Taking a Journey Along the Derisking Spectrum Corporate plan sponsors wishing to mitigate pension risk have a myriad of possible strategies at their disposal 12 Underfunded? Taking the LDI Path to Full Funding Most plan sponsors looking to dial down funded status volatility turn to liability-driven investing. But what’s the best approach among the many varieties available? 16 When Pension Risk Transfer Is the Right Option Annuity transaction volumes are increasing steadily, but still represent just 1% of overall DB assets. There’s plenty of potential capacity in the transfer market PS003_PI_20170612.pdf RunDate: 06/12/17 pi Pension Risk Strategies supp 8 x 10.875 Color: 4?C Advertising Supplement TAKING A JOURNEY Along the Derisking Spectrum Corporate plan sponsors wishing to mitigate pension risk have a myriad of possible strategies at their disposal op of the agenda for corporate plan business risks. The one most familiar to plan pays o if you hold it long enough. The sponsors: identifying, managing sponsors is investment risk: asset allocation, other important risk is the uctuation of dis- Tand mitigating risk. This is not a new mitigating defaults or downgrades, meeting count rates, driven by the rate environment. observation, but nevertheless it is one that return goals, as well as interest rate and A far distant third is longevity risk.” continues to ring true. Many corporate plans equity risk, while business risks include plan Managers have spent years educating remain underfunded, even though market governance, accounting impacts and the plan sponsors and investment committees movements have bumped up funded status duciary risk of litigation, among others. on the need to focus on the volatility of a bit for some. The volatility in this statistic “Liability risks include asset-liability funded status. “If a client isn’t focused on crystallizes the risk picture for pension plans mismatch, underfunding, mortality and funded status as the lens for their reporting, today. early retirement,” said Wayne Daniel, senior there’s potential for a misunderstanding of Being underfunded and therefore owing vice president and head of U.S. pensions at strategy and poor attribution,” said David money to the pension plan is an uncomfort- MetLife. “Most employers are not adequate- Eichhorn, managing director of investment able position. By denition, pension debt is ly equipped to manage all of these risks. strategies at NISA Investment Advisors. more volatile than corporate debt, because particularly liability related risks, because It’s also necessary for plan sponsors to its value is inuenced by the assets held in it really isn’t their business.” They are not understand which risk levers to pull when. the plan and the sponsor’s attitude on fund- in the business of pooling and managing “Once you’ve set the stage for reporting con- ing. The payback terms are dierent — and longevity risk, for example. sistently to the committee on funded status, change frequently as funding relief rules are then you can drill down into the strategies extended. Pension debt carries a signicant Risk levers that you are using to reduce funded status tax in the form of rising Pension Benet One metric now stands out, though, as the volatility,” said Cheryl Hanson, director, client Guaranty Corp. (PBGC) premiums. key to quantifying pension risk. “Funded ra- services at NISA Investment Advisors. Changing this picture by reducing tio volatility is the focus of most pension risk In order to prioritize a plan’s risks, plan pension debt and getting a grip on funded management frameworks, as it has been for sponsors should determine what they are status volatility requires moving many risk years,” said Francois Pellerin, LDI strategist trying to accomplish with their plan. First, levers. Pension funds run a wide range of at Fidelity Institutional Asset Management. where does the plan t with the company’s inherent risks, though they fall into three “That is mostly impacted by equity risk, other qualied plans? Then, said MetLife’s broad categories: investment, liability and which is generally a compensated risk that Daniel, “they need to consider how the plan 4 Pension Risk Management Strategies PS004_PI_20170612.pdf RunDate: 06/12/17 pi Pension Risk Strategies supp 8 x 10.875 Color: 4?C Advertising Supplement can help achieve the rm’s business and tal- sits in the capital structure, the cost of owner- to consider the real economic costs and ent retention goals in a way that meets the ship — all these things make it look and feel forecast the cash ows needed to maintain organization’s strategic focus and meets the like a real operating business on the balance the pension fund.” needs of the plan participants.” sheet,” he said. Understanding the dierence between It’s not surprising then to nd that pen- the accounting value of the pension plan sion risk is not just an HR issue, but also top Cash critical and the economic obligation is another of mind for nance executives, not least Just like any other operating business, pen- fundamental issue when considering derisk- because one of the pressures companies sion plans vie with other company units for ing. “It’s the only place on your balance sheet face is the need to make cash contributions cash. Today, as more companies come to the that you can hold accounts payable at a 7% to the plan. “The low funded status that conclusion that their underfunded pension discount to its economic value,” O’Brien said. plans face is the biggest challenge today,” plans won’t be rescued by market upturns, “I spend a lot of my time educating execu- said Daniel Morris, head of U.S. portfolio more are opting to issue company debt at tives about the need to think about pensions solutions at Schroders. “This is exacerbated today’s low rates to fund pension shortfalls on an economic basis, because once you by the wealth transfer that many plan are through voluntary contributions. “There’s a understand the economic value, only then experiencing. Even as contributions are corporate nance reason to issue bonds to can you think about the decision to retain the made today, many are just helping make fund the pension plan,” said Andrew Chorl- obligation or secure it through a settlement.” benet payments rather than improving the ton, head of U.S. multi-sector xed income “Plan sponsors are looking to minimize funding level over time. This also exacer- at Schroders. “And we are seeing companies cash contributions to the plan, so they are bates the risks that plans experience from doing this because of rising PBGC premi- looking holistically at the risks the plan is equity and xed-income investments. The ums, falling corporate bond yields and the facing,” said Schroders’ Morris. “That means impact of risk is amplied when plans are current tax status of corporate debt.” weighing the assets, liabilities and sponsor net payers of benets.” “The U.S. had lived through a three- covenant.” And that can sometimes mean Glenn O’Brien, managing director of decade-long bull market,” Prudential’s that a voluntary cash contribution is neces- U.S. distribution in Prudential’s pension risk O’Brien said. “At the conclusion of the bull sary. transfer business, identied pension plans as market, what looked like a free benet has When a pension fund has a signicant a signicant corporate nance issue today. now become an annuity company that is underfunded liability, the risk prole of the “The size and scale of the obligation, how it costly to own and maintain. Sponsors need continued on page 6 Pension Risk Management Strategies 5 PS005_PI_20170612.pdf RunDate: 06/12/17 pi Pension Risk Strategies supp 8 x 10.875 Color: 4?C Advertising Supplement company is increased. “But the risk pro le lump-sum exercise, or aim for hibernation, have some smoothing ability in terms of of the participants is signi cantly higher as keeping hold of those liabilities. As most funding shortfalls,” said Karl Dasher, CEO of well,” Prudential’s O’Brien said. “So when pension risk transfers involve retirees, what North America and co-head of xed income derisking for the company, the sponsor is are the implications of the decision to o- at Schroders.
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