(April 17, 2012) — The long-term trend of de-risking and Liability-Driven Investing (LDI) remains in place for many corporate defined benefit pension plans, according to a new white paper from Michael Moran, Pension Strategist at Goldman Sachs Asset Management.
“While funded levels have begun to recover in early 2012 given the rise in equity markets and long-term interest rates, they started the year at depths as low as those seen in late 2008 during the height of the financial crisis,” the paper concludes. “Low funded levels are pressuring some plan sponsors from a balance sheet, income statement and cash flow perspective, increasing the attention paid to pension issues from investors, bond holders, rating agencies and, of course, plan sponsors themselves.”
The still-volatile economic environment has added momentum to the number of corporate DB schemes pursuing LDI investing, according to Moran, who references Ford’s recent disclosure of increasing its long-term target allocation to fixed-income to 80%.
The paper continues: “While this long-term theme of de-risking is still evident, in the short-term, however, many plans may be hesitant to implement such strategies given recent declines in funded levels and historically low interest rates.”
Another trend among corporate DB schemes, according to the paper: Return assumptions remaining under pressure, leading to multiple ramifications for plan sponsors. Long-term expected returns on plan asset assumptions have steadily declined in the corporate space for several years, with larger plans historically using higher expected return assumptions than smaller plans. “We expect declines in this assumption will continue in the coming years,” the paper asserts.
Furthermore, GSAM predicts that contribution activity will be robust in 2012 and beyond, fueled by a combination of low funded levels, mandatory contribution requirement calculations, and, in some cases, large cash balances on corporate balance sheets. The paper notes: “A 2011 report from the Society of Actuaries estimated that minimum required contributions will rise steadily between now and 2016, ultimately peaking at $140 billion that year. That represents approximately three times the amount of minimum required contributions in 2011.”