Willis Towers Watson Redefines Pension Plan Investing Strategy for 2018

In “Ten Investment Actions for DB Plans in 2018,” Willis Towers Watson updates 10 terms that have traditionally been used with respect to defined benefit (DB) plans—but says each needs to be revisited in light of regulatory and market developments.

First off, pension plans have dealt with their fiduciary duties by ensuring that any decisions made with respect to the plan are reasonable and documented. In today’s world, Willis Towers Watson says, that won’t fly because DB plans are being held to a higher level of scrutiny than ever before and more parties are considered fiduciaries—and expected to be experts.

Secondly, pension plans have been considered fully funded when their assets have been equal to or exceeded accounting liabilities. The consulting firm says pension plan sponsors need to be more diligent about ensuring that their assets will, indeed, support future benefits for employees.

In the past, pension plans considered their time horizon to be a very long period of time until they would need to make their last benefit payment. In fact, Willis Towers Watson says, because people retire at different points, pension plan sponsors need to be aware that in some cases, their investment time horizon can be very short.

Fourth, pension plans have traditionally decided on an asset allocation strategy and accompanying investment managers and let their decisions rest. Today, Willis Towers Watson says, pension plan sponsors need to continually monitor their investments in light of changing market conditions, saying that in today’s world, a pension plan needs to adopt “the dynamic process of achieving a series of risk allocations that vary with market conditions and reflect the plan’s progress toward its funding and settlement objectives.”

Interest Rate Risk

Fifth, pension plans have traditionally maintained a short position relative to rises or decreases in interest rates. Today, the consulting firm says, pension plans need to price interest rate increases “into the forward curve, meaning potential gains … are lower than one might expect.”

Sixth, pension plans have handled liability-driven investing (LDI) by extending their interest rate exposure through long-duration fixed income investments. Today, Willis Towers Watson says, this
“can extend beyond long-duration fixed-income assets.”

Seventh, pension plans in the past have diversified their portfolios by investing in various regions of the globe and investment styles, such as value, growth and momentum. Today, Willis Towers Watson says, pension plan managers need to use a greater variety of investments and consider new investment ideas.

Eighth, in the past, pension plan fiduciary committees have met infrequently. Today, Willis Towers Watson recommends that they become more proactive and meet more regularly.

Ninth, pension plan committees have become accustomed to outsourcing just investment manager selection to a third party.  Willis Towers Watson suggests that pension plans outsource the entire investment management process to make it more efficient and less costly and to free up management to focus on their business at hand.

Finally, Willis Towers Watson implores pension plans to focus less on short term investment return goals and “ultimately secure benefits for all plan participants.”

THe report can be downloaded here.