Strategies for Locking in Pension Funding Gains

A new analysis from Russell Investments, featured in its January “LDI Update” report, finds while 2013 saw an increase in the funded status of pension plans, this year has begun on a less favorable note. The analysis points out there are ways plan sponsors can attempt to lock in pension funding gains.

Marty Jaugietis, managing director, LDI Solutions, Russell Investments tells PLANSPONSOR, “There should be some modeling done of the impact of a reduction in funded status volatility.” He says plan sponsors pursing such a strategy will also tend to invest more in an LDI-type portfolio, investing, for example, in something such as a fixed-income vehicle that possesses a duration similar to that of the plan’s liabilities.

The New York-based Jaugietis, who is one of the authors of the analysis, explains that de-risking and Liability-Responsive Asset Allocation (LRAA) schedules can be used as tools in the locking-in process: “The process to de-risk a plan is usually incremental. It’s not one step and you’re done. It’s also more cost-effective to de-risk over time. The LRAA schedules act as more of an investment policy strategy. As the funded status of a plan improves, a schedule can act as a glide path for funding all current and future plan liabilities.”

The report discusses plan sponsors using piping and de-risking triggers to foster a quicker response to funded status volatility. “I would define piping as the infrastructure and data feeds necessary to monitor plan liabilities and funded status on a daily basis. Piping can help plan sponsors measure when they hit certain triggers,” says Jaugietis. He explains that a plan sponsor can sit down with a provider and map out a set of responses for different levels of funded status (e.g., If trigger A happens, go with response B).

When a scenario unfolds in the marketplace and triggers are hit, the sponsor’s pre-planned response can then be carried out by the provider, who Jaugietis terms as the “LDI quarterback.” While the plan sponsor is still responsible for establishing and overseeing the content of the responses, this “quarterback” is responsible for actually carrying them out.

The “Russell LDI Update” for January can be downloaded here.