“We’ve been big proponents of derisking [pension plans], such as using LDI strategies that reduce risk as funded status rises,” says Tom Harvey, director of the Advisory Team within SEI’s Institutional group in Oaks, Pennsylvania.
However, he tells PLANSPONSOR that, depending on plan size, now is not the time for most defined benefit (DB) plan sponsors to de-risk or annuitize their plans.
In a Q&A on SEI’s website, Harvey explains that “the goal of de-risking strategies is to minimize volatility between the investment asset pool and the pension liabilities, based on how pension liabilities are calculated for accounting and funding purposes. Reducing the swing between these two measures creates more certainty for both the projected funding gap and required contributions. Currently, these two measures—generally accepted accounting principles (GAAP) and Employee Retirement Income Security Act (ERISA) funding—have diverged. This has created an environment for most plan sponsors where surplus volatility against the liability doesn’t trigger additional contributions, thus reducing the value of the LDI strategy.”
Add to that new funding relief that lowers required contributions for DB plans, and Harvey says DB plans’ funding status is going down. “If plan sponsors haven’t been using LDI aggressively in the past, now is not time to do that or to annuitize because now they will have to pay an insurer more to move assets,” he says. NEXT: Pursue greater returns