Managing Pension Assets in Stressed Markets

Three steps to help navigate these challenging times.


Adam Hickman [00:00:05] 2022 has been challenging across the board in financial markets, with double-digit losses in most of the common indices. Despite these difficulties, pension plan funded statuses have remained level or even improved in some cases as liabilities have decreased, as interest rates have spiked. I wanted to offer some helpful tips to navigate this challenging environment. First, use your plan's investment policy statement (or IPS) to guide decisions. Investment committees and professionals should lean on these policies during times of stress when it seems there are no good options. Sound IPS for corporate-defined benefit plans will consider the help of the pension in defining the plan's asset allocation. Your plan's IPS should provide the appropriate level of guidance to avoid knee-jerk reactions that may lead to inappropriate risks within the portfolio. Now, timely execution is key. A well-designed investment strategy is not enough without proper execution. Funded ratios may improve, even in down markets, as liabilities shrink. De-risking in these conditions requires careful oversight and swift action. Many sponsors have changed funding strategies recently, and the investment strategy and asset allocation should adjust accordingly. For example, a plan sponsor may be more willing to re-risk in this environment, considering lower contributions and a longer time horizon for funding. Finally, liability hedging fixed income allocation ultimately becomes the most significant allocation for most plans and should be carefully constructed. Consider executing a strategy that protects the plan's funded status in all interest rate environments. This can be accomplished by matching the duration of the fixed income to the liabilities at all points on the yield curve for physical bonds. If you have any questions or you'd like to continue the conversation, please contact me or one of my teammates. You can also find additional information by visiting our webpage. Thank you for your time today, and I wish you all the best.