The Markets January 30, 2017

Trends, Regulations Could Affect Not-for-Profit Health Care Investments

Mercer suggests not-for-profit health care organizations keep an eye of 403(b) lawsuits, ACA regulations and DB funding, among other things, when making investment decisions in 2017.
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Mercer suggests areas of focus for not-for-profit health care organizations as costs may grow faster than revenues and possible post-election changes to the Affordable Care Act may have significant impact.

First, Mercer suggests not-for-profit health care organizations take note of recent 403 (b) lawsuits. Higher education institutions have faced a spate of lawsuits regarding their 403(b) plans. Not-for-profit health care organizations should take heed of this and ensure that their benefits and investment committees have reviewed vendor relationships and fees and optimized investment options so that their retirement plans are following best practices, especially not-for-profit health care organizations who have recently completed a merger and/or may have multiple defined contribution (DC) plans.

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Mercer also suggests any not-for-profit health care organizations that are either undergoing or considering actions such as mergers and acquisitions (M&As), operating agreements or joint ventures should be aware that some of these actions may materially alter an organization’s balance sheet. Finance and investment committees should consider how best to integrate investment strategy and whether these factors may necessitate a change in their investment risk profile.

Interest rates have risen since the U.S. presidential election and may rise further, so not-for-profit health care organizations should assess their overall interest rate sensitivity, incorporating their investment assets, retirement plans and debt portfolio. Specifically, some organizations’ debt portfolios may benefit from higher interest rates as much of their debt portfolio is fixed rate. Those with a defined benefit (DB) retirement plan may see a reduced liability with higher long-term rates.

Though rates have recently risen, interest rates have been low for several years; in turn affecting not-for-profit health care organizations’ DB plans’ funded status. Funded status fluctuates based on interest rate activity, investment returns and plan sponsor cash contributions. Achieving a fully funded DB plan typically takes years, so it is important to develop a roadmap to de-risk a plan as funded status improves. This means not-for-profit health care organizations should review their current DB investment strategy and make appropriate changes as required, Mercer says.

NEXT: Other suggestions

Other suggestions from Mercer include:

  • Assess impact of the election: The new administration may have significant implications for the Affordable Care Act. Organizations should reevaluate their risk tolerance and investment strategies, as operating results may be significantly affected by potential changes.
  • Plan holistically: Not-for-profit health care organizations should take an enterprise-wide view of their investment risk posture and integrate their investment strategy with their financial plans. Organizations’ risk level should account for illiquid investment strategies that may be excluded from the days-cash-on-hand calculation.
  • Acknowledge ‘country bias’: US markets have outpaced most others since the bottom of the great recession in 2009. After such an extended period of dominance, it is perhaps natural for U.S. investors to raise the debate of whether they should keep their globally diversified portfolio. Not-for-profit health care organizations should evaluate the pros and cons of their current asset allocation and determine if they should make their allocations based on global market weights or peer behavior.
  • Evaluate inflation sensitive investments: Changes in global pricing dynamics need to be evaluated by investment committees. Nonprofit committees must balance the negative impact to inflation-sensitive investments in today’s low-inflation or deflationary trend with the potential for inflation surprises.
  • Review governance structures: Not-for-profit health care organizations are being pressured to reduce costs while increasing the quality of care. In this environment, health care organizations may want to look at outsourcing some elements of their investment function to potentially reduce investment expenses and free up staff and committee time to focus on strategy.
  • Adopt socially responsible investment principles: Socially responsible investment offers not-for-profit health care organizations the opportunity to align their investment values with their core mission to promote health by screening out investments with significant revenue from tobacco, alcohol and firearms products, among others. Socially responsible investment, which can be tailored to fit well with an institution’s core values, should be considered by not-for-profit health care organizations in 2017.

The not-for-profit health care 2017 priorities paper can be found here.

The Markets January 30, 2017

Institutional Investors Must Dial Back Return Expectations

Medium- and long-term return assumptions that had already been fairly muted heading into 2017 should be adjusted downward even further, a new analysis from Cerulli Associates contends. 
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A new report from Cerulli Associates discusses the major challenges U.S. institutional investors face in accomplishing their investment goals—observing cause for both optimism and concern.

According to the first quarter 2017 issue of “The Cerulli Edge – U.S. Institutional Edition,” unfavorable forward-looking return projections across several asset classes, tied to recent shifts in the interest rate environment, are causing significant uncertainty for large and small asset owners.

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“Institutional investors have faced a variety of pressures during the past year that have made achieving their investment goals very challenging,” observes Chris Mason, senior analyst at Cerulli. “The difficult market environment, including historically low interest rate levels, has wreaked havoc on corporate defined benefit plan sponsors, in particular.”

As other research and data providers have noted, interest rate declines pretty much characterized the whole first half of 2016 and then some, with the end of August marking the lowest pension contribution discount rates in more than 15 years. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity.

Cerulli suggests the recent increase in interest rates following the election has “sparked renewed interest in pension de-risking and liability-driven investing among these institutional investors,” Mason adds. “Cerulli believes that in order for managers to serve their clients most effectively, it is imperative they understand how these specific challenges affect institutions as a whole.”

Cerulli expects that, as rates continue to rise, investment managers will focus on highlighting and continuing to expand their liability-driven investing (LDI) solutions.

“Proactive managers that educate plan sponsors about the benefits of de-risking will be the best positioned in the marketplace,” the research suggests.

More information about obtaining Cerulli Associates research is available here. 

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