Defined Benefit Plan Sponsors Should Reassess Their Investments

In light of the coronavirus pandemic and the subsequent lockdowns and pivot to working from home, Willis Towers Watson has issued a report, “Top 10 Investment Actions for DB Plans in 2021,” intended to help guide the decisions of defined benefit (DB) plan sponsors.

The first thing Willis Towers Watson suggests that DB sponsors do is enhance the governance structure and the framework of their plans. Sponsors should pay particular attention to re-risking, rebalancing and raising liquidity, because those plan sponsors that rebalanced their portfolios following the market sell-offs in March were able to capitalize on the rebound that happened shortly thereafter. Willis Towers Watson also suggests that sponsors might want to consider moving to an outsourced chief investment officer (OCIO) model.

Second, the consultancy says sponsors should leverage manager skill and specialization. Specifically, Willis Towers Watson says that while many sponsors might have passive equity and bond investments, they “may lead to more risk and return concentration than intended, [and] for bond investments, passive management may not adequately compensate for downgrades and defaults.” Now may be a good time for sponsors to reconsider active managers, the report suggests.

Third, Willis Towers Watson recommends integrating diversity and inclusion (D&I). While this has been a hot-button issue for how organizations are run and there have been calls to increase diversity in personnel, it can also be applied to pension assets in terms of being well diversified. This includes measuring diversity and examining requirements for new managers, the report says.

Fourth: Reassess risk tolerance. COVID-19 has brought changes to companies’ business risks. This inevitably affects their benefit plans, Willis Towers Watson says. Now is the time to do a thorough asset-liability study.

Willis Towers Watson’s fifth suggestion is to harness illiquidity, namely private equity, real assets and private debt.

Point number six: Flex your assets in line with broader plan management. By this, Willis Towers Watson means that assets should efficiently reflect a pension plan’s funding situation, progress and planned and unplanned lump-sum distributions. Make sure that asset and liability teams are working in tandem.

Achieving the best bang for your buck is recommendation number seven. Think beyond return seeking and liability hedging assets. “For example, long Treasuries hedge a significant percentage of the volatility of liabilities while also benefiting from a flight to safety during a crisis,” Willis Towers Watson says. “This can free up additional capital to target more return-seeking assets.”

Willis Towers Watson’s eighth suggestion is to exploit unpredictability. “Market disruption seems to be part of the new world,” the consultancy says. “Monetary and fiscal policy stimuli are interrupting traditional business cycles.” Sponsors should turn to less cyclical investments and consider how cities will be impacted if virtual work and suburban flight are permanent.

Nine: Include sustainability investing in the portfolio. The report says sponsors should consider how to include environmental, social and governance (ESG) investing in the portfolio.

Finally, reassess fees. The lowest fees are not necessarily the best. It might be smarter to pay a little more in investment fees for talented, active or specialist portfolio managers, Willis Towers Watson says.