Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.
Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.
LDI. Liability driven investment and de-risking clearly was the winning strategy at the end of 2019, which caused collective sighs of relief when the pandemic hit.
- Overall, the sentiment was that the equity market now seems to have gotten ahead of itself, so some participants are keeping some liquidity available for market downturns.
Different paths. One theme emerging from a projects and priorities discussion at the meeting was that there was no uniformity in pension strategy among member companies. There is no gold standard “answer.” Why? Because of variations in underlying situations, such as companies with active vs. frozen plans, varying demographics of plan participants, and well-funded plans vs. those with a large deficit.
- The current roller-coaster environment makes it challenging to shift pension strategy, particularly given corporate governance issues and board oversight.
An example of this is different approaches to glide paths: some companies only have de-risking triggers as funded status improves, others have re-risking as well when equity investment value declines, and others have no defined glide path at all.
- In one sponsor presentation on pension risk management, a more sophisticated evolution was presented using outright option positions, collars and option replication using delta hedging.
Options an option? Still, these strategies are challenged by the currently high volatility behind option pricing and, in particular, the volatility skew which makes out-of-the-money put options particularly expensive.
- It sounded like a few meeting participants had investigated these strategies but again are challenged by governance issues in authorization for them. Some participants are not even using derivative overlays at this point. Derivative overlays facilitate rapid shifts in risk position without the costs of buying and selling underlying cash investments, and also allow for better management of overall risk.
