While retirement benefit offerings have largely shifted away from defined benefit pension plans to defined contribution plans, successfully managing an existing defined benefit plan is sometimes critical to a company’s overall success. Sponsors of frozen plans are often looking for ways to terminate their plans or to immunize the liability on their balance sheets. For other employers that view the pension plan as a key piece of their employee benefit strategy, managing the costs and risks associated with the plan is a top priority. Defining the right investment strategy is important regardless of the goal. Before setting a strategy, it’s important to understand why the investment strategies of pension plans differ from most common investment approaches.
We believe that investment policies for pension plans should be customized with an understanding of each plan’s circumstances and situation, ideally after analyzing and comparing various alternatives through a robust asset-liability study. While many of the chief considerations are consistent with those that are relevant for other types of investment mandates (time horizon, risk tolerance and return needs), they must be considered within the context of the obligation to plan participants and the regulatory environment in which pension plans operate.
This paper discusses the following:
- The plan liability
- The plan’s assets
- Risk and return
- Asset categories
- Liability-driven investing (LDI)
- Asset-liability modeling
- De-risking and glidepaths
- Plan termination