VALLEY FORGE, Pa., Nov. 17, 2016 /PRNewswire/ -- Corporate pension plan sponsors are increasingly focused on curbing plan costs amidst challenging market and regulatory environments, including low interest rates, longer life expectancies, and rising premiums, according to new Vanguard research. Released today, Vanguard's latest Survey of Defined Benefit Plan Sponsors found that plan costs was the top concern among the more than 175 pension managers surveyed, followed closely by funded status risk.
Moreover, these concerns are driving priority investment objectives, which defined benefit (DB) plan sponsors overwhelmingly identified as minimizing cash contributions and reducing funding status volatility. However, in stark contrast, sponsors are under mounting pressure to ensure their plans meet funding requirements either through cash contributions or return-generating asset allocations in the portfolio—the latter of which can expose the pension to increased funding volatility.
"Our research has continued to point to a trend of cost reduction and risk management across the pension industry," said Kimberly Stockton, an analyst in Vanguard Investment Strategy Group and author of the paper. "Yet, there's a continued disconnect between these crucial objectives and existing portfolio construction. There is an opportunity for plan sponsors to implement strategic asset allocations to better protect themselves from unexpected costs and risk."
Vanguard's analysis of survey responses point to three persistent and concerning trends:
- Asset allocation has remained static since 2012 despite plan design changes.
Despite a growing number of frozen plans, the average asset allocation reported in 2015 was almost identical to 2012: 48% equities, 39% bonds, 2% cash, and 11% alternatives. The 2015 DB survey respondents with frozen plans reported an average funded status of 84%, likely influencing the outsized equity allocations. However, 32% of frozen plans also signaled a planned termination in the next several years, suggesting that portfolios might still be assuming too much risk.
- Fixed income allocations aren't liability-hedged.
While the average allocation to fixed income was unchanged, the types of fixed income products that plan sponsors are utilizing shifted slightly towards longer-duration products that better match plan liabilities. Despite this emerging trend, there is room for improvement. For plans with larger return-seeking allocations, Vanguard believes that the fixed income allocation—the liability-hedging allocation—should be at least duration-matched.
- Investment strategies might not align with risk tolerances.
An important component of a liability-driven investment strategy is managing funding ratio volatility, and sponsors identified this as a top investment objective. As such, the vast majority of surveyed sponsors believe that only a 1-10% variance in plan-funding ratio is acceptable. However, Vanguard's analysis found that the average asset allocation was well beyond the 10% variability threshold, suggesting that investment strategies are not appropriately aligned with risk tolerances.
Different end goals but shared focus on costs
Vanguard's report reflects a long-term industry trend of declining open and active plans, with the number of frozen plans nearly doubling in the past five years. However, there is also a meaningful portion of plan sponsors that are committed to offering a pension over the long-term. Of the 30% of plan sponsors who reported having open, active plans, 86% said they continue to value the plan as a recruiting and retention tool. Despite different end goals and approaches to investment management, cost concerns were universal across both the closed and active sponsor segments.
"Regardless of plan design phase, we are hearing from plan sponsors that there is a great need for guidance in today's challenging world of pension management. Portfolios need to be risk-appropriate, designed to achieve and maintain full funding, and aligned with your overall strategy—all with an eye toward costs," said Christopher Philips, head of Vanguard Institutional Advisory Services, which serves defined benefit plans and other institutional investors. "In an unpredictable market environment, we encourage plan sponsors to focus on the areas within their control: The fees they pay for their plans' investment products and the fees they pay for advice."
The third edition of Vanguard's Survey of Defined Benefit Plan Sponsors represents the investment and plan design perspectives of 178 corporate pension plan sponsors. Vanguard's survey evaluates how sponsors are managing plans in the current market and regulatory environment and identifies trends relative to Vanguard's 2010 and 2012 surveys. Plan size ranged from $20 million to $50 million (11%) to more than $5 billion (8%), with an average plan size of approximately $1 billion and total plan assets across the entire survey of approximately $180.9 billion.
An institutional investment leader and pension partner
Vanguard Institutional Advisory Services® (VIAS) partners with DB plan sponsors to provide ongoing portfolio construction and management, and extensive research and investment expertise. Leveraging Vanguard's scale and capabilities as a global investment provider, VIAS offers an outsourced chief investment officer (OCIO) model, and serves as an extension of a pension's board and investment staff. VIAS aims to optimize portfolios to meet short- and long-term goals, working with DB sponsors to develop a dynamic investment policy statement that identifies appropriate asset allocation strategies and preserves gains in funding status through a custom portfolio glide path. VIAS is part of Vanguard's industry-leading Institutional Investor Services, which provides asset management and advisory services to defined contribution and benefit plans, insurance general accounts, and endowments and foundations.
Vanguard is one of the world's largest investment management companies. As of October 31, 2016, Vanguard managed $3.8 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 350 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.
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Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
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