By Joseph Neu
The NeuGroup for Pension and Benefits 2020 H1 meeting took place last week, sponsored by BNY Mellon and their subject matter expert Insight Investment.
Here are a few takeaways I wanted to share:
Interregnum part 2. Insight Investment CEO Abdallah Nauphal put the Covid-19 crisis into the context of his thesis presented last October that the world is in an interregnum period between the financial-economic system that emerged from World War II and what comes next. Covid-19 is a likely trigger for pushing us further toward a new financial economic order.
To pass through it, his colleagues note, we will probably travel through three acts of crisis:
- Act 1, a liquidity crisis
- Act 2, a credit crisis and
- Act 3, an inflation crisis that will ultimately crescendo to the crisis that ushers in a new system.
- We are currently entering Act 2, the credit crisis, which means pension funds should continue to allocate investments to high-quality credits and select, lower-quality assets with visible cash flows offering better returns.
- Pension plan sponsors need to use Act 2 to win authorization from plan committees to move quickly when it is time to target real cash flows and inflation protection, shifting allocations to inflation-linked assets and bonds, equities and other real assets.
Pension best practice is very firm and situation dependent. For example, LDI and hedge strategies were validated by this crisis. The performance of fixed income assets boosted the confidence of plans that deployed LDI and also STRIPS and overlay strategies.
- But it helped to be in a well-funded position to implement them in the first place.
- And you also need to have committee approval to deploy overlays.
Underfunded plans, meanwhile, now face big decisions to make regarding the timing of moves to rebalance toward equities or otherwise re-risk.
Recreating a “pension” option for DC plans. Traditional annuities offered by insurance companies have earned a bad reputation, yet employees who retire fear running out of money more than they do dying.
- Employers should, therefore, look to offer DC plan participants retirement income certainty options to keep retirees in their plans and
- Work with the investment and insurance community to design better solutions.