Rebalancing Can Be an Important Tool for DB Plans During Volatile Market
J.P. Morgan’s proprietary analysis of the 100 largest corporate pensions reveals several lessons defined benefit plan sponsors can learn from last year.
The 2020 funded status of the 100 largest corporate defined benefit (DB) plans by assets rose only slightly as double-digit equity returns were offset by a decline to record-low discount rates, according to a proprietary analysis conducted by J.P. Morgan Asset Management.
The report, written by Michael Buchenholz, head of U.S. pension strategy, institutional strategy and analytics, reveals the benefits that came from rebalancing liability-driven investing (LDI) portfolios during the market volatility of last year. He first points out that for plan sponsors to have meaningfully rebalanced into risk, they would have needed a two-way glide path permitting re-risking or an investment team with wide discretion; the ability to quickly raise liquidity, in the portfolio or from the sponsor; and the capacity and ability to conduct transactions on short notice.
To illustrate the potential benefits of reallocating, J.P. Morgan took a simple 50%/50% LDI portfolio and estimated returns under different rebalancing policies. Without any rebalancing, the sample portfolio—50% MSCI All Country World Index (ACWI), 40% U.S. long credit and 10% U.S. long Treasuries—earned 15.2%, a bit better than the top 100 plans’ average return of 14.2%. Rebalancing monthly back to target allocations earned an additional 80 basis points (bps), while rebalancing just once at March 31 earned an additional 225 bps.
Buchenholz notes that hedge portfolios are still the focal point of most LDI strategies, but he suggests that corporate DB plans might have put up an illusory line of defense with corporate credit.
“One of the most pernicious adversaries of hedge portfolio effectiveness is credit defaults and downgrades, generating fixed income losses and liability increases as higher yielding bonds exit the pension discount curve universe,” the report says. “Corporate bond hedges become … sources of vulnerability.”
However, in late March, the Federal Reserve’s announcement of policy measures, including primary and secondary market corporate bond-buying programs, helped drive long corporate spreads down from a peak of 360 bps on March 23 to about 230 bps by the end of April. Buchenholz says these downgrades, in addition to leniency from credit agencies, might be keeping liability valuations artificially depressed. He adds that the proprietary analysis found less than 10% of fixed income portfolios are allocated away from traditional investment grade credit and Treasurys to hedge diversifiers such as mortgage loans, securitized assets and emerging market debt.
The report notes that employer contributions into DB plans surged in the fourth quarter of 2020. Buchenholz says it’s understandable that DB plan sponsors waited for economic conditions to stabilize before committing mostly voluntary contributions to their plans, but cash infusions tend to be most valuable during periods of economic stress. J.P. Morgan examined contribution scenarios with varied timing and fund allocation and found that the best opportunities were contributing to fund equities in March. This would have returned almost 50% or cost roughly 68 cents to buy a dollar of end-of-year assets.
Taking the lessons from the past year, J.P. Morgan recommends that re-evaluating glide path triggers and bands while permitting re-risking can set plans up to take advantage of future market dislocations.
The firm also suggests that corporate DB plans fortify their hedges with diversified exposures such as securitized assets.
In addition, DB plans should consider alternative assets. “As expected returns have continued to fall, alternative asset classes have an increasingly important role to play in generating returns, diversification and income. By taking stock of intermediate-term liquidity needs like benefit payments and potential risk transfer transactions, corporate pension plans can better understand their tolerance for illiquid assets in the portfolio,” the report says.
Voya Financial adds to leadership team; Schroders announces changes within leadership team; Mayer Brown announces new partner in Employment and Benefits group; and more.
Voya Financial Inc. has announced several updates to its leadership team.
In addition to his role as chief financial officer and overseeing Voya’s finance and risk areas, Michael Smith also will now serve as vice chairman. Michael Katz, Voya’s chief strategy, planning and investor relations officer, and Santhosh Keshavan, Voya’s chief information officer, also will join Voya’s executive committee. Katz and Keshavan will continue to report to Smith.
Charles Nelson will serve as vice chairman and chief growth officer and will shape Voya’s growth strategy, including customer segmentation. He will oversee enterprise revenue-growth activities, including sales and distribution, relationship management, health and wealth marketing and customer solutions. William Harmon, who will continue to report to Nelson, will also assume a new role as Voya’s chief client officer, leading the health and wealth sales, distribution and relationship management teams.
Heather Lavallee, who currently serves as president of retirement tax-exempt markets, will become CEO of wealth solutions, and Robert Grubka, who currently serves as president of employee benefits, will become CEO, Health Solutions.
Grubka and Lavallee—who also will join Voya’s executive committee and will now report to Martin—will collaborate with Christine Hurtsellers, CEO of investment management, to accelerate Voya’s enterprise business growth.
Schroders Announces Changes Within Leadership Team
Schroders has promoted several executives across the Americas into new leadership positions.
Tiffani Potesta will be promoted to chief strategy officer, North America. Potesta has been with Schroders for more than nine years and currently serves as chief administrative officer, North America. Currently, Potesta leads Schroders’North America business management and strategy. In addition to her oversight responsibilities across distribution strategy, marketing, product development and client service, she will focus on several additional strategic developments such as further establishing Schroders as a dominant brand in sustainability. In her new role, she will continue to work alongside Marc Brookman, chief executive officer, North America.
Carin Muhlbaum will become chief administrative officer, Americas. Muhlbaum has been with the firm for more than 20 years and currently serves as Schroders’general counsel, Americas. She will retain this role for the region as well as her current oversight responsibilities with respect to risk and compliance and will expand her role to include local oversight of operations and fund administration.
William Sauer will become head of operations, Americas. He currently serves as Schroders’head of investor services and has been at the firm for 14 years. He is currently responsible for managing fund administration and product implementation while overseeing the team responsible for Schroders’branded products. In his new role, Sauer will continue to be responsible for of fund administration and will be taking on additional responsibilities in operations and investment services.
Mark Hemenetz, Schroders’chief operating officer (COO), Americas, will retire at the end of May. He has been with the firm for more than 18 years and has been a part of Schroders’recent expansion and led such initiatives including the move of the U.S. headquarters and the acquisition and integration of STW and the Securitized Credit Team.
Mayer Brown Announces New Partner in Employment & Benefits Group
Mayer Brown announced that Erin Cho has joined the firm as a partner in its Employment & Benefits Group in Washington D.C., specializing in Employee Retirement Income Security Act (ERISA) Title I fiduciary matters. Cho was previously at Davis Polk & Wardwell LLP and most recently Groom Law Group.
“We are excited to have Erin join us,” says Maureen Gorman, a co-leader of Mayer Brown’s Employment & Benefits practice. “Erin’s expertise in ERISA fiduciary matters is of critical importance to financial institutions, insurance companies, asset managers and other retirement plan service providers, which makes her an invaluable addition to our practice and a terrific resource for our clients throughout the country. Our focus on being the premier adviser in the private investment fund area, as well as in connection with ERISA fiduciary advice, requires the caliber of counsel that Erin will provide to our clients.”
Cho advises companies on a wide range of matters involving ERISA’s fiduciary and conflict-of-interest rules. She has experience advising broker/dealers (B/Ds), asset managers and insurance companies with respect to the many and varied services and financial products, including complex structured products and derivatives, provided to U.S. pension plans. Cho counsels hedge funds and private equity clients on the consequences of accepting investments by benefit plan investors, as well as plan assets and prohibited transaction concerns arising in connection with venture capital investments and corporate transactions.
In addition, Cho counsels plan sponsors on all aspects of ERISA fiduciary compliance, including plan governance, plan expense issues, and the selection and monitoring of plan investment options. She also represents clients in front of the Department of Labor (DOL) on advisory opinion and exemption requests as well as in audits and investigations.
“I’ve long admired Mayer Brown’s strength in various key areas, including ERISA, employee benefits and ERISA litigation as well as its strong international footprint and commitment to growth in the funds area,” Cho says. “I’m delighted to return to a full-service firm, which provides a greater opportunity for me to bring in a broader team of experts to help my clients solve complex challenges.”
“Erin has a strong national reputation and is a well-respected lawyer in the ERISA bar,” saysRaj De, the managing partner of Mayer Brown’s Washington D.C. office.“Erin has the specialization that we are looking for as we further strengthen our ERISA fiduciary capabilities. Adding top-tier talent in the industry such as Erin is one of our many strategic approaches to ensure we continue delivering full-service excellence.”
Lockton Hires CIO
Jamie Battmer has joined Lockton Retirement Services as its chief investment officer (CIO). Battmer’s role will focus on enhancing and accelerating the development of retirement solutions available to Lockton’s clients.
“Our clients expect and require sophisticated solutions that meet both their fiduciary obligations and improve participant outcomes,” says Pam Popp, president of Lockton Retirement Services. “Jamie’s addition to our leadership team ensures that our investment capabilities consistently complement our overall service offering and amplify results for our clients and their employees.”
Battmer brings over a decade of experience in both institutional and wealth management investment consulting from Resources Investment Advisors, where he previously served as CIO. He has proven success as a lead portfolio manager, strategist, non-discretionary manager and investment product innovator. Additionally, Battmer earned a master’s degree in economics and economic history from the London School of Economics.
Lockton Retirement Services says it is committed to offering solutions that evolve with the retirement industry and compliance standards. “The opportunity to join an organization with an impeccable reputation and commitment to continual innovation is very exciting,” says Battmer. “Lockton is uniquely qualified to provide the holistic solutions necessary to combat the retirement crisis facing the average American worker.”
“As we continue to advance our financial wellness, pooled employer plans [PEPs] and managed account offerings, Jamie is the leader we need on board to deliver best-in-class results,” says Tom Clark, on behalf of Lockton Retirement’s executive committee. “We’re thrilled to build on the incredible momentum Lockton Retirement is already experiencing and look forward to continued growth and client success.”
Ascensus Acquires ABV Advisors’ Book-of-Business Service
Ascensus has acquired a health and welfare Form 5500 preparation and plan document services business from ABV Advisors. Financial terms of the deal were not disclosed.
Based in Carmel, Indiana, ABV Advisors is a benefit compliance advisory firm that serves brokers of employee benefit plans, financial advisers, professional employer organizations and affinity associations throughout the U.S. Its primary specialty is Employee Retirement Income Security Act (ERISA)-related compliance for employee benefit plans, including wrap plan documents, preparation of Department of Labor (DOL) Form 5500, and Patient Protection and Affordable Care Act (ACA) required Forms 1094-C and 1095-C.
“The team at ABV Advisors truly understands the importance of an employee benefit plan to a company and its employees, as well as the complexities of maintaining that plan,” says Kevin Cox, president of Ascensus’ retirement line of business. “Ascensus looks forward to being a trusted partner and resource for ABV Advisors’ brokers, advisers and plan sponsors via our deep industry expertise, outstanding client service and proven technology platform.”
“At ABV Advisors, our highly consultative, client-centric approach has allowed us to build trusting, long-lasting relationships with our clients, including large, nationally recognized employee benefits consulting, insurance brokerage and accounting firms,” notes Anne Vandeveer, ABV Advisors’ president. “We know these clients will receive the same high-touch interactions from Ascensus and look forward to sharing our decades of knowledge and experience in continuing to service these clients.”
“ABV Advisors has worked diligently over the years to cultivate an extremely loyal client base as well as a strong reputation for excellence,” says Raghav Nandagopal, Ascensus’ chief corporate development officer. “Adding its business allows us to continue to build upon that reputation under the Ascensus brand while expanding our health and welfare Form 5500 and ERISA-related compliance capabilities.”
“We’re excited to integrate ABV Advisors’ compliance expertise and build solid, long-term relationships with its network of employee benefit brokers, advisers and plan sponsors,” Nandagopal adds.
ICMA-RC Announces Name Change
ICMA-RCis becoming MissionSquare Retirement.
According to the company, extensive client and industry research identified an opportunity to increase brand recognition while “amplifying the commitment to public sector employees.”
With the change to MissionSquare Retirement, the company says it will remain the same non-stock, nonprofit, mission-based company focused on “delivering results-oriented retirement plans, education, investments and advice.”
“I am very pleased to announce an important milestone in our corporation today as we become MissionSquare Retirement,”says ICMA-RC CEO and President Lynne Ford. “We crafted our new name and brand to capture the essence of who we have always been as a company and it represents the growing diversity of our clients while also amplifying what makes us unique—our commitment to serving those who serve communities. We look forward to offering expanded and leading services, technologies and experiences to more participants as MissionSquare Retirement.”
The transition to MissionSquare Retirement has already started with more updates expected in the coming months.
