Investing January 8, 2018

Mercer Offers Focus Tips for E&F Investment Committees

Among tips Mercer suggests is evaluating litigation vulnerability at a time when lawsuits against higher education 403(b) plan sponsors are higher than ever.

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As the new year settles in, Mercer has released 10 key tips for endowment and foundation (E&F) investment committees, from how to revisit economic, social and governance (ESG) investing to reframing the tone behind active and passive investing.

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“E&F portfolios continue to benefit from strong equity markets, with overseas investments contributing at a greater rate than in most periods since the 2008 financial crisis. Record high equity markets, however, may lull investors into a false sense of comfort. Market dynamics make the persistence of this bull run more fragile,” says Ken Shimberg, U.S. Endowment & Foundations chief investment officer, Mercer. “Concurrently, greater reliance on endowments makes institutions more vulnerable to adverse events. Staff and committees should apply a strategic perspective to governance processes and implementation considerations to ensure they provide the checks and balances necessary to support successful investment execution.”

Other areas of focus suggested for E&F investment committees, included in the Top Ideas for Endowment and Foundation Investment Committees whitepaper, are implementing a “do nothing” strategy, where committees embrace smaller benefits and maintain assets at current weights for future opportunities; evaluating litigation vulnerability at a time when lawsuits against higher education 403(b) plan sponsors are higher than ever—having skyrocketed in the past two years—; and increasing awareness of tax changes, including the latest modifications in tax reform.

Mercer also suggests that to take full advantage of market dislocations, E&F investment committees should review ways that portfolio structure and policy can promote agility in investing to accommodate attractive investment opportunities as they arise. In addition, investment committee and staff processes for reacting to an extraordinary event could be rusty, as the credit crisis was nearly a decade ago, Mercer says. Processes should be reviewed to ensure that they are best suited to current committee dynamics and preferred means of communication. Specific and rules-based protocols should help inform timely decision-making during an adverse event and lessen the behavioral impact that inevitably influence decisions in stressed conditions. Guidelines should reflect the most accurate snapshot of the institution’s risk tolerance.


Mercer says that according to NACUBO data, in the year ending June 2016, endowments with $500 million or less reduced both equities and fixed income in favor of less-liquid strategies. The firm says committees should identify likely demand for capital in the event of a market correction. Institutions may want to establish lines of credit or similar on-demand borrowing, relying on existing banking relationships to negotiate preferential fees and ensure that contracts will be stable through an adverse event.

The full list of Mercer’s tips can be downloaded from here.

Administration January 8, 2018

Tax Reform Fuels DB Plan Accelerated Funding

Michael A. Moran, with GSAM, says the firm expects voluntary contribution activity to continue into 2018, as defined benefit plan sponsors claim a deduction at their former, higher tax rate.

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Since, under tax reform, the corporate tax rate will be lower in the future than what had previously been in effect, more voluntary defined benefit (DB) plan contribution activity is expected, according to Michael A. Moran, managing director and chief pension strategist with Goldman Sachs Asset Management (GSAM).

In a Q&A on GSAM’s website, Moran explains that contributions to corporate DB plans are generally tax deductible up to certain limits. For plan sponsors that were contemplating making a contribution in future years, some decided to accelerate that contribution into 2017 in order to reap the benefits of getting the tax deduction at a higher rate. GSAM observed that Kroger and Valvoline are two examples of companies that explicitly cited potential corporate tax reform as one of the reasons for making a voluntary contribution earlier in 2017.

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According to Moran, since plan sponsors can under certain circumstances make a contribution up to eight and one-half months after the end of the year and still have it count as a deduction for the previous tax year, the firm expects voluntary contribution activity to continue into 2018 where sponsors claim a deduction at their former, higher tax rate.

In addition, changes to repatriation rules under tax reform may make foreign cash more accessible for U.S. multi-nationals, which may enable them to continue to make voluntary contributions in the future.  Moran says estimates of total overseas cash for U.S. companies have been in the range of $1 to $2.5 trillion.

He points out there have been several other factors which have also provided plan sponsors with an incentive to put more money into their plans sooner rather than later, including Pension Benefit Guaranty Corporation (PBGC) premiums.

Increased contribution activity leads to higher funded ratios which may be a catalyst for more de-risking activities, according to Moran. This may take the form of increased allocations to long duration fixed income, to better match plan liabilities, as well as more risk transfer activities since better funded plans make it easier for the plan sponsor to transfer liabilities to a third-party insurance company.

However, he notes that some DB plan sponsors may not find a borrow-to-fund strategy as compelling as before the enactment of tax reform. “In particular, for certain companies, interest deductions are generally limited to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for tax years beginning before 1/1/2022, and to 30% of Earnings Before Interest and Taxes (EBIT) for subsequent tax years. Given this, the ability to use existing corporate cash for pension funding may become more critical,” he says.

Moran also warns that increased flexibility around cash may mean that some U.S. multi-nationals may not need to issue as many bonds going forward to fund buybacks, dividend increases, capital expenditures, etc. “Just as more corporate DB plans are looking to add long-duration fixed income to their portfolios as funded ratios move higher from contribution activity, the new supply of long duration fixed income securities may decline,” he says.

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