De-Risking Strategies at Important Juncture

Many mid-market pension plans are considering de-risking, but still need to create a formal strategy.

The 2013 Pyramis U.S. Corporate Mid-Market Pulse Poll, conducted by Pyramis Global Advisors in association with Asset International, publisher of PLANADVISER, found with some unsure of a specific end state for their plan, mid-market pension plan sponsors are at “a pivotal juncture.” The survey findings show these plan sponsors need a long-term strategic objective and formal de-risking triggers.

However, when trying to decide whether to de-risk their pension plans, there are several factors for plan sponsors to consider, says Chuck McKenzie, head of institutional solutions at Pyramis. “Plan sponsors have to think about what information they will need to be able to say yes or no to de-risking a plan,” McKenzie told PLANADVISER.

The survey results show 15% of plan sponsors are concerned about the current funded status of their plans. McKenzie says in light of this concern, “Plan sponsors definitely need to look at the plan’s funded status in deciding whether or not to de-risk. It’s really not doable for a plan to de-risk if its funding ratio is at 60% or lower.”

There are other factors that should be considered as well, says McKenzie. “You have to compare what it would cost to fully fund the plan versus what it would cost to terminate the plan, since those two costs are often very different. You also need to determine if you have the internal staff or consultants necessary to carry out de-risking.”

Risk management is definitely a priority with plan sponsors according to the survey results, with nearly one-third (31%) saying it is their top concern with regard to their plan’s investment portfolio.

One way plans are trying to better manage their risk profile is by reducing exposure to domestic markets. “Plan sponsors are more risk aware than they were 10 or even five years ago. They want to be smarter about diversifying than they have been in the past. They want to make their risk profile look better than what the traditional 60/40 split of domestic stocks and bonds can provide,” says McKenzie.

McKenzie says it was surprising to find only one in four plans have a program to de-risk over time. "We also found that two-thirds of plan sponsors say they spend more time on their pension plan than they did five years ago. And we found that less than half of those we polled say they will de-risk, due to the fact that they simply don’t have the time and resources to dedicate to it.”

He adds that plan sponsors do want to know their options are, and be able to carry out the most appropriate one when needed, so they are outsourcing these evaluation tasks. “We found that 49% of plan sponsors are either outsourcing such tasks to a service provider or a strategic partner,” says McKenzie.

The survey results also point to the need for set of triggers to be established, indicators that would signal to plan sponsors whether conditions are right for de-risking. The top triggers noted are improved funding status of the plan (31%), a significant increase in long-term interest rates (17%), and a philosophical shift in focus toward managing the volatility of their funding status (15%).

However, when asked if they had such triggers in place, only 15% of plan sponsors say yes, with 55% of plan sponsors saying they do not and 30% saying they do not but intend to establish them in the future.

Pyramis has released a report titled “Liability Transfer Using Annuity-in-Kind Portfolios: An Effective Risk-Management Approach for Plan Sponsors,” to supplement findings of the survey. More information about the report can be found here.

The survey was conducted online during September and October. The 166 U.S. corporate mid-market institutional investors surveyed have plan assets under management between $50 million and $500 million. The cumulative assets under management represented by respondents totaled more than $32 billion.

More information about the survey can be found here.