Sunday, 1 March 2015
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Jan 17 2013 | 2:36pm ET
A full 70% of the defined benefit pension plans polled by Cambridge, Mass.-based consulting firm NEPC report using some form of liability-driven investment strategy.
The 2012 Corporate Pension Plan Trends Survey polled 74 corporate defined benefits programs representing over $100 billion in pension assets from a cross section of industries.
The survey also found that plans not using LDI had considered its merits but rejected the strategy and that plan size was a differentiating factor in the way LDI was implemented and glide paths managed while funded status was less significant.
Despite persistent low interest rates, NEPC said it had observed a significant increase in the total allocations into hedging assets. The firm also noted an “explosive” increase in the use of glide paths by corporate pension plans. Moreover, nearly all plan sponsors have outsourced the monitoring of their glide path.
Bradley S. Smith, NEPC partner, said in a statement that it's important to work with an experienced LDI investment consultant: “Too many clients assume that simply moving assets into a long corporate bond portfolio will solve their surplus volatility issues. Unfortunately, even after a plan is materially de-risked, it is still subjected to significant basis risk (where liability estimates and hedging portfolio performance don’t move in tandem). Estimated liabilities will continue to be a moving target until the liabilities are settled. Clients need to develop a balanced de-risking glide path that manages both surplus risk and basis risk. Clients who fail to account for both sides of the risk ledger should not be surprised when they are required to make additional contributions, even after the plan is fully de-risked.” NEPC’s integrates our forward looking capital market assumptions with our industry leading risk measurement tools to enable our consultants to build custom glide paths that balance both surplus volatility and basis risk.
Jan 23 2015 | 1:00pm ET
In our new section, FINtech Focus, we will profile one of these firms each week. While fintech is a broad category, we will be focusing on firms that specifically cater to the alternative investment industry. Read more…