Pension plan funding levels have been high for a number of years. Fully funded high, and then some. That’s good news, of course. But that raises a question: “Now what?”

Industry experts in a July 23 P&I Online webinar discussed steps that a plan sponsor, and the service providers it enlists, can and may want to take once a plan reaches full funding levels or more. Panelists included Mark Tavares, Partner and Lead of Corporate Defined Benefit Solutions at Aon; Calvin Yu, Managing Director and Co-Head of the Client Solutions Group at BlackRock; and Dan Tremblay, Head of Pension Solutions at Fidelity Investments. The moderator was Gauri Goyal, Senior Director of Content and Programming at Pensions & Investments.

Plan sponsors were focused on being fully funded, said Tavares, but “now that so many are, there’s a fork in the road.” With full funding, he continued, many are now asking, “Where do we go from here?’

Risk

Yu suggested one direction some take. As funding status improves, he said, “The natural next step is to reduce risk.” He suggested three steps that can be taken in considering how to do that:

1. 1. reassess glide path;
   2. evaluate hedge ratios; and
   3. clarify the end game.

One way to mitigate risk, said Yu, is reallocation. He cited BlackRock data that showed that reallocation for an average corporate pension can involve reducing investment in public equity and increasing investment in private credit. But one size does not fit all, Yu indicated, saying that customization becomes critical in pursuing reallocation.

Tremblay expressed a similar sentiment, observing that who risk alignment is implemented “depends on the individual situation.” He added that “there are a whole lot of influences” in the matter, such as overall duration, key rates, liability, dollar duration, and hedge ratio.

Tremblay outlined how Fidelity suggests addressing one of those influences — liability— in light of its relevance to investing plan funds. Their approach incorporates the following.

• • Strategic design, which involves analysis of pension risk, current and desired end state, contribution strategy, funded ratio volatility tolerance, potential financial impact, and liquidity needs.
  • Manager selection, which incorporates analysis of proprietary sources, active and passage management, and due diligence.
  • Active asset allocation, which involves analysis of active bands related to policy benchmarks, capitalizing on relative value or market dislocations, quantitative and fundamental assessment; and consideration of balance risk and return.

OCIOs

One source to which plan sponsors turn for assistance in managing plans, including handling the circumstances arising from full and overfunding, such as managing risk, is outsourced chief investment officers (OCIOs) — which really are outside investment managers. Yu reported that there is an increase in interest in OCIOs across business systems and “an increase in the number of sophisticated organizations” doing so.

Goyal noted that OCIOs have evolved from their original purpose and now meet a variety of developments and situations. Yu expressed a similar sentiment, telling attendees that OCIO is “not a one-size-fits-all” model, since “every client has a unique set of goals.” There is a common thread, however, which he said is providing greater clarity regarding how assets are managed.

Tremblay suggested that OCIOs also can change the standards by which measurements can be made. “With OCIOs, the glidepath becomes your benchmark,” he said.

Working with OCIOs, said Yu, is about leveraging capabilities. “Customization is key,” he said.

The Bottom Line

So what are the most important things to keep in mind in a time in which pension plans are fully — or even over — funded?

“You really need to be flexible, you need to be nimble, you need to be a good listener,” said Tremblay, adding that it’s important “to know what keep you clients up at night.” Similarly, Tavares suggested having conversations with clients and prospective clients about their needs and concerns.

Governance also is a key consideration, argued Tavares. “Governance, transparency, and partnership in meeting goals are the key to success,” he said.

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