November 29, 2023 | Stamford, CT — The rapid rise in interest rates left many U.S. corporate pension plans with portfolios built for the previous low-rate, low-yield, lower-funding status environment. In the wake of this sudden shift, plan sponsors who have implemented sophisticated liability-driven investment (LDI) strategies are re-evaluating the line-ups of external firms they use to manage assets. 

The surge in rates has been extremely helpful to pension plan sponsors as increases in interest rates lower the valuation of pension fund liabilities. As a result, since rates started climbing in 2022, many U.S. corporate plans have climbed from underfunded status to fully funded and beyond. Almost three-quarters of the pension plans taking part in a recent Coalition Greenwich study sponsored by Franklin Templeton report funding ratios of 100% or higher, with nearly a quarter (23%) of plans reporting funding ratios in excess of 110%. Only 27% of plans have a funding status below 100%.

“This historic shift has changed the goal for most corporate DB plan sponsors from maximizing investment returns relative to their liabilities to maintaining their newly healthy funding ratios and minimizing volatility,” says Todd Glickson, Head of Investment Management – North America at Coalition Greenwich and author of Corporate DBs Move to Secure Funded Status Gains and Begin Endgame.

Diversifying LDI Programs with New Asset Managers
As plan sponsors work toward desired end states like hibernation and risk transfer, a significant share are contemplating adding new asset managers to diversify investment approaches within their LDI program, enhance liability hedging and downside protection, and otherwise position their plans for a new phase of plan management and LDI.

Approximately 30% of study participants are contemplating changes and of these, almost half are moving to improve downside protection and/or increase manager diversification. Approximately 70% of plans in the study are re-evaluating their current manager rosters to see if they have the right mix to achieve plan goals given current funded status, with 23% stating that they plan to add new managers to their LDI lineups.

“Corporate plan sponsors plans are evaluating if they need to diversify their portfolios by adding new managers with investment philosophies and styles less reliant on credit beta,” says Todd Glickson. “For example, integrating advanced portfolio construction techniques as a primary source of alpha can provide both enhanced diversification and downside mitigation to an existing multi-manager liability-hedging portfolio.”