Structured Equity can Increase Funded Status – A Successful Investment Strategy for the Past, Present, and Future
Challenging investment markets in 2020 have undone years of improvement in the funding levels of corporate defined benefit pension plans. The funding level of a typical plan, as noted in a recent study by Mercer, fell from 88% at the end of 2019 to 80% at the end of April . However, pension plan sponsors do not need to accept that significant funding level declines are the inevitable consequence of tough markets. It is possible to do much better.
Plan Sponsors embarking on an annuity purchase face additional uncertainty and risks due to the impact of COVID-19. Transactions will continue, but awareness of market conditions and performing due diligence of insurance providers takes on additional importance.
We find ourselves in difficult times. The global effects of COVID-19 have wreaked havoc on investment markets, on daily life and on institutional investment pools such as pension funds and endowments. Treasury yields have plummeted, credit spreads have widened, and major equity indices have fallen to levels not seen since 2016. In times like these, many investors are wondering how they can possibly find their way out…
In 2019 plan sponsors witnessed a familiar, albeit more extreme, combination of returns that has also been the theme of the entire previous decade. Equities rallied, long term interest rates fell, and funding levels didn’t increase to levels that plan sponsors expected for a typical pension plan. However, some sponsors utilized equity derivatives to make the investment portfolio work harder while managing risks more efficiently, and consequently saw their plans’ funded ratios materially increase over the same time period.
Public sector and church pension plan sponsors face unique but similar financial challenges. This paper covers an alternative approach to constructing investment portfolios that can better help meet their needs by seeking equal to or greater investment returns with less funded status volatility than conventional investment strategies.
Private Equity is illiquid and challenging to benchmark. Many investors use “S&P 500 +3%” in order to compare performance in the absence of an observable, investable asset. This paper describes a methodology for creating a private equity proxy or replication strategy using derivatives.
With the growing number of annuity purchases taking place in the market today, it is imperative that plan sponsors understand the fiduciary implications for implementing this de-risking strategy.
This article addresses three major features common to most TDFs’ structure: asset allocation (specifically, equity exposure), management style (including active and passive management, use of proprietary funds, and tactical asset allocation), and fees – which, if not evaluated carefully and on a manager-by-manager basis, could result in a mismatch between an employer’s goals and participant investment results.
Strong markets coupled with favorable changes in corporate tax rates made 2017 a very good year for pension plan sponsors. The continuing run up in the equity markets meant that most plan sponsors saw funded status improvements in 2017 in spite of discount rate declines.
The equity markets have been extremely volatile over the past two weeks. Are these market movements perhaps the start of something big, or just the first step to volatility returning to a more typical level?