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CCH® PENSION — 06/21/11

Large plan sponsors shifting to liability-matching investments to reduce volatility, Aon Hewitt survey reveals

Large pension plan sponsors are shifting their asset allocation away from domestic equities in favor of liability-matching investments in an effort to reduce plan volatility, according to a new survey from Aon Hewitt. The survey of 227 large U.S. employers, representing $389 billion in total assets, revealed that in 2010, 38% of plan sponsors reduced their exposure to domestic equities and the same percentage expects to do so in 2011. Only 4% of sponsors expect to increase domestic equity exposure.

Plan sponsors are primarily shifting assets to liability-matching investments with long-duration corporate bonds as the asset of choice, the survey showed. Nearly a third (32%) of plan sponsors expect to increase allocation to long-duration bonds and 24% expect to increase allocation to other corporate bonds, while just 13% expect to do so for government bonds.

"Once just a strategic idea without much traction, liability-matching investments continue to grow as a proportion of plan assets," said Ari Jacobs, retirement strategy leader at Aon Hewitt. "Regardless of the future direction of equity and bond markets, this shift should bring less volatility and greater predictability to pension plan costs."

Dynamic investment policies being adopted

The Aon Hewitt survey also showed that static investment policies are giving way to dynamic investment policies, or "glidepaths," that incorporate plan-specific objectives, such as funded status, to mitigate pension risk. By 2010, more than one in five sponsors had already adopted some form of dynamic investment policy, up from 15% in 2009. Nearly three out of ten plan sponsors expect to be operating some form of dynamic policy in the next year.

"Most sponsors believe that their plans should take on less risk as they reach full-funded status," explained Jacobs. "These sponsors find glidepaths compelling because they translate this view into investment policy. Additionally, we believe that this strategy is a smart way to harness market volatility for the benefit of the plan and the sponsor, because glidepaths can potentially reduce cost even as they reduce risk."

As more plan sponsors have turned to glidepaths to manage pension risk, fewer are making fundamental changes to their plan design, the survey showed. While a majority of plans (61%) are already closed to new entrants, many plan sponsors continue to accrue benefits for at least some portion of their workers. Just under a third (32%) of plan sponsors now report frozen plans, up slightly from 30% in 2009, and only 16% believe a freeze is likely in the future.

Source: Aon Hewitt news release, May 10, 2011.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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