Defined benefit plan sponsors will review investment strategy once financial markets stabilize. At the top of the list will be asset de-risking. In 2019, most plans moved beyond waiting for interest rates to rise before hedging liabilities and lowering costs such as PBGC premiums. Included in this review, investment committees should consider the following:
- As a first point of action, defined benefit plans (both private and public) will most likely be underweight equities and will need to rebalance investment portfolios back to target investment policy guidelines.
- Most plans will continue to follow their LDI strategic asset allocation, choosing not to re-risk from a glide path perspective. Antidotal reports state that LDI managers have reported that only about 20% of clients are re-risking.
- Given wider credit spreads, plan sponsors should review their interest rate and credit spread hedge composition. Plan sponsors are taking advantage of this opportunity to increase credit exposure and optimize hedge ratios.
- The current economic environment will put a strain on contributions as corporations will be stretched to funnel cash flows to contributions. The combination of Fed support and attractive borrowing rates for high quality corporate bond issuance may provide an opportunity for some companies to borrow to fund pensions.