Strategies to address the underfunded status of a pension plan should not be off the shelf. They need to be customized to the needs of the plan and of the organization. This is a story of a client who engaged Russell Investments as their Outsourced CIO (OCIO) to tailor an approach to improve funded status and reduce portfolio risk.
A global manufacturer of industrial goods with more than 15,000 employees in 50 countries, made a conscious decision to keep their cash-balance defined benefit plan open as an ongoing part of its employee retention strategy. Plan assets in the U.S. totaled over $350 million.
Over the years, the plan's funded status had dropped to nearly 60%. With Pension Protection Act (PPA) mandated plan contributions looming, the investment committee needed to not only re-build funded status, but also de-risk the plan; limit surplus volatility; and reduce the likelihood of required cash contributions in the future.
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The investment committee believed that the best means of fulfilling their ongoing fiduciary responsibilities was through a greater focus on strategy, delegation, and oversight rather than day-to-day implementation. Accordingly, they hired Russell Investments as an outsourced investment manager responsible for not only delivering advice, but for implementing that advice on a daily basis. Together, Russell Investments and the committee worked through a full asset/liability study, which led to multiple portfolio recommendations designed to improve funded status and reduce portfolio risk as funded status returned to acceptable levels. As a result, they implemented the following:
- Adopted an LDI (liability-driven investing) approach
- Implemented a de-risking glidepath in which the allocation to return seeking and liability hedging assets would evolve as new funding thresholds were achieved—which effectively reduced portfolio risk over time and helping insulate the plan from market downturns
- Adjusted the fixed income portfolio to better match the duration of plan liabilities
- Enhanced the return-seeking portfolio through greater international exposure
The adoption of these goals represented a paradigm shift in the management of the plan; re-defining the success of the program as progress towards improved funded status rather than simply beating benchmarks within each individual asset class. This new perspective resulted in a new approach to plan management and a new set of investment goals and tactics.
By adopting an LDI approach to managing the pension and implementing a de-risking glide path, the company was able to:
- Improve the match between pension assets and liabilities
- Decrease funded status volatility in times of market distress
- Make plan contributions with confidence, eventually improving the funded status of the plan from 61% to 93% funded over four years
- Increase diversification levels and return expectations within the return-seeking portion of the portfolio
This is one story. But it's not your story.
As an institutional investor, your situation, your constraints, and your challenges are just as unique to you. If you're ready to demand a customized, holistic solution set, we'd like to talk.
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