Funding a Top Focus of DB Plan Sponsors

While they work to fund their plans, however, uncertainties make it more difficult to calculate liabilities and returns over the long term.

A fully funded defined benefit (DB) plan reduces future financial risk to the company sponsoring the plan and enables the consideration of different investment strategies available to maintain full funding, notes a survey report from Prudential.

It can also lay the groundwork for the next stages of DB risk management, such as transferring pension obligations to a third-party insurer.

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The survey shows that, while some companies still need to improve just to reach the minimum funded level required by law, others are working towards higher funded ratios. Sixty-four percent of respondents report either that their companies have already increased contributions (15%) or that they are likely to do so within two years (49%).

The issue of funding pension plans has risen to the attention of companies’ leadership. When asked if their board of directors and senior management are focused on the financial risk of their DB plans, four times as many respondents agree (48%) as disagree (12%). The remainder neither agree nor disagree.

However, uncertainties about the timing of interest rate increases, continued volatility in equity markets, and increasing life expectancies make it more difficult to calculate liabilities and returns over the long term. Accordingly, half of the firms in the survey (49%) report that they have modeled future DB contributions based on assumptions of extreme market volatility, while 62% have modeled for increasing longevity.

One way to manage volatility is through the use of liability-driven investing (LDI). Seven out of 10 respondents (71%) report that their companies already invest some portion of their DB plan assets in LDI strategies. Thirty-five percent (35%) of this year’s respondents view LDI as an initial step towards full DB liability transfer, and 32% say their adoption of LDI has significantly reduced DB risk.

NEXT: Preparing for longevity risk

In addition to volatility, longevity risk continues to garner increased attention. The Society of Actuaries has published new mortality tables based on longer life expectancies, with the result that projected liabilities may increase for some companies.

The survey shows that most companies are preparing to account for the increase in life expectancies in their calculations. About six in 10 respondents (61%) say either that they have reviewed participant mortality experience within the past 12 months (46%) or are planning on doing so within the next 12 months (15%).

One option for managing the risk involved with mortality assumptions is longevity insurance. Nearly one-quarter of respondents (23%) believe that these types of transactions could be relevant for their own companies.

However, the largest proportion of respondents (35%) say that they do not yet know enough about the longevity insurance transactions to have an opinion, and an additional 9% are not aware of the transactions at all.

In a recent conversation with PLANSPONSOR, Rohit Mathur, head of Global Product & Market Solutions, Pension & Structured Solutions at Prudential Retirement in Newark, New Jersey, said borrowing to fund is a viable funding strategy for nearly all DB plan sponsors.

Results of the sixth annual survey CFO Research has conducted with Prudential Financial, are based on survey responses of 180 finance executives, most of whom (78%) work at large U.S. companies with more than $1 billion in annual revenues. All of the companies in the survey also have DB plans with more than $250 million in assets; 31% have between $1 billion and $5 billion in assets, and an additional 31% have more than $5 billion in assets.

Investment Product and Service Launches

Russell Investments forms new global client strategy and research team; Wilshire Consulting launches the Wilshire ClimateLens; Hartford Funds reveals plans to acquire Lattice Strategies. 

Russell Investments Launches New Client Strategy Team

Russell Investments announced the formation of a new team within its investment division, dubbed Global Client Strategy & Research (GCS&R).

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The GSC&R team is charged with “integrating the firm’s full breadth of asset-allocation expertise across regions and businesses, enhancing its ability to design innovative strategies for multi-asset solutions.”

Jeff Hussey, global chief investment officer at Russell Investments, explains that investors increasingly want the asset management industry to focus on their individual outcomes, “whether it’s increasing or preserving funded status for a pension plan or building a reliable stream of retirement income for an individual.” He says multi-asset solutions offer investors the “wide range of levers required to meet one’s investing goals, particularly amid volatile markets; and asset allocation is one of the most important considerations for translating objectives into true outcomes.”

Kevin Turner, a 21-year veteran of Russell Investments, has been appointed to lead the new GCS&R team, reporting to Brian Meath, global chief investment officer, multi-asset solutions. Turner, who now holds the title of managing director, global head of client strategy and research, most recently served as the head of consulting for the firm’s institutional business in North America.

To present more information the firm’s new approach to achieving investor outcomes through a multi-asset approach, Russell Investments released this video.

NEXT: Wilshire Consulting launches the Wilshire ClimateLens

Wilshire Consulting launches the Wilshire ClimateLens

Wilshire Consulting announced the launch of Wilshire ClimateLens, a four-part program designed to help clients understand and make informed decisions about the risks and opportunities associated with climate change.  

Wilshire ClimateLens was introduced with a new white paper, “ClimateChange: Evolving Risks and Opportunities for Asset Owners,” co-authored by Wilshire Consulting President Andrew Junkin.  The Wilshire ClimateLens program advises clients to approach climate change as a “broad exercise in risk management, which includes both active engagement and thoughtful investment solutions.”

As detailed in the paper, the four components of the Wilshire ClimateLens program can be taken in sequence or, alternatively, can be integrated individually into an existing strategic plan. They include:

  • Education:  This introductory step provides a structured program explaining the fundamental factors related to the intersection of climate change and investing, including a review of climate science, possible resulting economic consequences, and the risk-return considerations associated with policy and regulatory responses. 
  • Assessment:  The second phase involves the evaluation of current climate-related investment and risk exposure in the context of investment objectives and analyzes organizational capacity, including an assessment of governance and policies, asset allocation, manager selection, engagement, and carbon footprinting.
  • Planning:  As a part of the process, Wilshire Consulting designs a strategic blueprint to identify how asset allocation, investment process and policies, risk management, governance, and operations could be modified to better manage future exposure to climate risk and help capture climate-related opportunities within a prudent decision-making framework.
  • Implementation:  At this stage, Wilshire Consulting executes mission-specific climate-change-related actions that calibrate the portfolio to desired risk-return targets while ensuring the adoption of best practices and procedures.

More information is available at http://wilshire.com/

NEXT: Hartford Funds to Acquire Lattice Strategies

Hartford Funds to Acquire Lattice Strategies

Hartford Funds announced that it has signed a definitive agreement to acquire Lattice Strategies, an investment management firm and provider of strategic beta exchange-traded funds (ETF).

This acquisition marks Hartford Funds’ expansion into the ETF space, “adding robust investment management and product development capabilities to its existing portfolio of actively managed mutual funds.”

“We are excited to acquire Lattice Strategies’ distinctive ETF offering and investment capabilities, which we foresee being increasingly demanded by financial professionals and their clients,” explains Jim Davey, president of Hartford Funds. “The strategic beta space is a natural extension of Hartford Funds’ actively managed platform, enabling us to enter a fast-growing category that will serve as a foundation for growth in the future.”

The acquisition, which is expected to close in the third quarter of 2016, pending customary closing conditions, builds on Hartford Funds’ active management platform and creates in-house investment and product development capabilities for future ETF strategies. Lattice Strategies’ strategic beta ETFs seek growth through multi-factor security selection and the deliberate allocation of risk.

In addition to these strategies, Lattice Strategies provides a range of multi-asset solutions, including liquid endowments, alternatives, equity, and income strategies. Upon completion of the acquisition, Hartford Funds will maintain Lattice Strategies’ office in San Francisco and welcome Lattice’s team of more than 20 professionals.

For more information about Hartford Funds, visit www.hartfordfunds.com.  

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