With the COVID-19 pandemic causing volatile markets, many defined benefit (DB) plan sponsors found their past strategies need revamping in an effort to handle the crisis of today. Al Pierce, Managing Director of SEI’s North American Institutional Advice Team, says the first thing SEI does with clients is to discuss what is happening at the sponsor company itself — balance sheets, cash flows and profit and loss (P&L) forecasts can be volatile as well.

Plan sponsors should start looking into liability driven investing, whether it is appropriate as to the risk associated and if they feel comfortable taking that on. Corporate bond spreads have been very volatile because of the COVID-19 pandemic. The same thing happened during the 2008-2009 financial crisis, but anyone using swaps or Treasuries outperformed. Now, rates have not moved. 

Piece explains, “If a plan sponsor uses an LDI glide path and was 90% funded, it may have had 40% of assets in LDI vehicles. But, now it may be 85% funded. The first question should be how is it going to move along the glide path given the volatile situation now. It may need to stay on its glide path but, if so, expected outcomes will be different — expectations for return and the yield path are different than when the glide path was set. It likely should reduce assets in LDI vehicles.”

He adds that it is uncertain what the next three to five years will look like for required contributions to plans as well. “2019 was unusual in that asset growth was strong and the calculation of liabilities was strong. This year, discount rates used to measure liabilities are flat and asset values are down. This will impact required contributions,” Pierce says.

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Legal Note

Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company.

Investing involves risk including possible loss of principal. There can be no assurance goals will be met nor that risk can be managed successfully.

Liability-driven investing, is primarily slated toward gaining enough assets to cover all current and future liabilities. A glide path determines how the asset allocation mix changes as the target date approaches. Beta is a measure of volatility in relation to the overall market. A non-directional hedge aims to generate a stable return regardless of market performance. Pension risk transfer strategies offer options for a DB provider to offload some or all of the plan’s risk (e.g., retirement income liabilities to former employee beneficiaries)

This material represents an assessment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.