Following our successful roundtable last fall, we are moving ahead with a new peer group.
The NeuGroup for Pension and Benefits is for corporate finance professionals who are willing to share and learn with others who think creatively and test some out-of-the-box ideas about managing assets to offset pension and other defined benefit liabilities.
- Trying times. With interest rates at historic low levels and concerns about them going lower and possibly even into negative territory, the risk management of defined benefit pension plans has become more challenging. This challenge is made more problematic with equity markets near all-time highs. Sticking to a liability driven investment (LDI) strategy in times like this tests your faith in it.
- Achieving desired outcomes. Managers of pension funds on a decumulation journey (with more cash flows going out of the plan than coming in) need to be wary of the different dynamics in this stage of the savings cycle. Such investors are more vulnerable to shocks and more susceptible to forced selling, all with a greater time dependency on realizing returns. This makes the traditional approach to pension fund management, which is asset focused and relies on maximizing returns and minimizing risk, inappropriate. Stay focused instead on the outcome your fund wants to achieve and deploy assets to maximize the certainty of achieving that outcome.
- Getting through the interregnum. Rethinking a maximum return approach is particularly needed during periods of major, rapid, institutional transitions that Abdallah Nauphal, CEO of Insight Investment, called “interregnums” at our roundtable in the fall. These periods tend to create increased volatility in asset markets. In the current one, the key developed economies must eventually move from exploring the limits of monetary policy to pursuing a monetized fiscal expansion: “Governments are prepared like never before to intervene in our economies,” Mr. Nauphal said. But this activism may not stave off a crisis; a potential interregnum transition might look like this:
- Monetizing the fiscal expansion leads to inflation.
- Inflationary conditions lead to a crisis from which a new order emerges.
- Hopefully, the new order is an extremely prosperous one—e.g., an Industrial Revolution 4.0 that’s fueled by smart machines and AI—and the crisis that precedes it is not too painful.
- For pension plans, there are two basic approaches to get through a period like this:
- Add certainty. The better funded a given plan is, the easier it may be to design a strategy to maximize the certainty of meeting its objectives, e.g., minimizing funded status volatility.
- Add resiliency. For plans that are significantly underfunded, it also becomes important to find ways to increase the resilience of the overall portfolio construction/asset allocation.
NeuGroup is pleased to be working again with Mr. Nauphal and his team at Insight Investment on the NeuGroup for Pension and Benefits, sponsored by BNY Mellon, of which Insight Investment is a part. At the May 12 meeting in New York, we will explore more alternative approaches to de-risking, including derivatives overlay strategies, plan governance trends, ESG investing for DB and DC plans, plus unitization.
If you would like to come together with peers to share and learn on the above and more, contact us to inquire about joining the NeuGroup for Pension and Benefits.