Nuveen, Others Take Aim at Untapped $250B Pension Market

July 01, 2014 (FundFire)– Small corporate pensions account for somewhere between $200 billion and $250 billion in , but that market is drastically underserved when it comes to liability-driven investment (LDI) strategies, managers say. A handful of firms are rushing in to fill the void left by managers who haven’t seen worthwhile revenue in pensions with less than $100 million.

In recent months, firms like Nuveen Asset Management, Asset Management and Sage have built out their LDI teams or rolled out new products targeted at these defined benefit plans as they continue to freeze, close, or simply seek to immunize liabilities as funding status improves.

While most LDI managers require clients to have a minimum of $100 million to create a separate account, David Wilson, head of solutions at Nuveen, says his firm sets the bar at about $20 million for separate accounts and is targeting plans as small as $15 million as part of a strategy to build its relatively young LDI portfolio.

"I have noticed for small plans, they don’t get as much attention … They are shut out," he says.

So far, Nuveen’s smallest LDI client has $43 million in assets. Plans smaller than $15 million don’t have the money to pay for the level of customization that Nuveen regularly provides, he says.

"After that it gets a little tough to generate the revenue that we need to make it profitable" he says.

SEI Investments has used its outsourced CIO (OCIO) arm to administer LDI to smaller pensions, including the recent addition of $28 million Los Angeles Philharmonic Defined Benefit Plan.

LDI services require significant , and full discretion reduces costs, which is particularly important for a small plan, says Jon Waite, director of advice and chief actuary at SEI. OCIO services also create more efficient investment for a portfolio as it eliminates quarterly meetings, he says.

By: Tim Sturrock Reference: http://fundfire.com/c/920684/89124/nuveen_others_take_untapped_pension_market?referrer_module=issueHeadline&module_order=0

"Giving us discretion allows us to better manage the match of the assets to the liabilities," he says. Implementing an LDI strategy can be a challenge for pensions under $20 million since they don’t have the necessary scale to implement some positions that LDI strategies require, Waite says.

More than 15,000 plans have between $1 million to $10 million in assets, and much of that market is untapped because many plan sponsors that don’t meet minimums for bond-like instruments such as derivatives, interest rate swaps and duration extensions, says Robert Smith, president and CIO of Sage.

He estimates that there is $50 billion to $100 billion in total AUM in that market.

"There are a lot of barriers that are a challenge for small plans but that doesn’t mean that there are no good solutions," Smith says. "But doing it the way a big plan does it is cost prohibitive." Sage has begun offering a portfolio of credit and government bond ETFs to match liabilities for smaller plans, he says. Sage also adjusts portfolios monthly to reflect changes in liabilities and discount curve.

ETF-based approaches are only one way of accessing the smaller pensions, Wilson says, adding that for smaller pensions, Sage’s solution makes sense. Derivatives-based pooled funds and commingled funds are other options, Wilson says.

And, there are managers willing to go after even the smallest funds.

Manulife Asset Management has patented a series of products for small- and mid-sized pension plans that aim to mimic LDI, as reported. The six funds are tailored to separate funding status levels and match liabilities through a series of passive equities and long duration funds to de-risk portfolios.

Many plans on the very small side don’t pursue LDI because they’ve heard they are too small, Smith adds. "We want to wake people up. From the regulatory stand point you have the same challenges. From a fiduciary standpoint you have the same challenges. Just because you are small doesn’t mean [the challenges] go away," he says.

By: Tim Sturrock Reference: http://fundfire.com/c/920684/89124/nuveen_others_take_untapped_pension_market?referrer_module=issueHeadline&module_order=0