When Harshal Chaudhari joined the General Electric Pension Trust as CIO of global pension operations in 2019, he had quite the challenge in front of him. At the end of 2019, the GE pension’s trust assets were $52.6 billion, while obligations measured $65.1 billion. Being 81% funded was respectable, yet a funding shortfall of $12.5 billion persisted, with no future contributions to aid the gap, as the U.S. GE pension plan has been frozen to new participants since 2012.

“Our deficit we can calculate in terms of dollars, as well as a ratio of assets to liabilities,” Chaudhari told CIO. “[Last year], we actually improved upon our deficit, but we kind of treaded water in terms of the funded ratio, so in dollar terms, we made significant strides, and from that perspective, we did well.”

Key to the pension’s success in making ground on its deficit was the risk management employed by the investment office.

The GE Pension Trust is among the 15 largest corporate pension systems in the world by total assets, with the fair value of its assets assessed at $83.5 billion in the company’s 2021 annual report. The GE Pension plan covers 177,000 retirees and beneficiaries, 88,500 vested former employees and 24,500 active employees and includes 41 U.S. and non-U.S. pension plans with pension asset or obligations greater than $50 million, covering 57,000 retirees and beneficiaries, 48,000 vested former employees and 22,000 active employees worldwide, according to GE’s 2021 Form 10-K filing.

As if managing a massive retirement system were not complicated enough, Chaudhari was also helping prepare for GE’s split into three entities. The firm completed the first step in its new architecture when GE HealthCare spun off in early January. The firm is planning to split its power division into a new entity, GE Vernova, in early 2024, while retaining its aviation business as GE Aviation.

The split of the conglomerate “kept us really busy last year,” Chaudhari says. The restructuring provided “a different way of managing risk,” which challenged the pension office to pursue innovation solutions, so as “to not mess things up in that transition.”

The spin-off required the system to split into three plans, utilizing a formation of a master trust, which holds the main pension’s asset base in place. The system then set up three separate sub-trusts, which provided the structure for this one-of-a-kind operation.

“Each sub-trust now owns units in the master trust, so we didn’t have to break anything up,” Chaudhari explains of the formation. “But at the same time, each of these three companies can now express their own risk appetite, and we were able to retain all the flexibility that we could possibly have retained, while accommodating the three companies wanting different asset allocations.”

Employing a more routine definition of risk management is also of chief concern to Chaudhari.

“I always have a risk management mentality in my investments, because I want to own generative assets, but they don’t protect the downside at all times,” Chaudhari says.

Two areas within the portfolio in which Chaudhari and team have employed tighter controls over the risk profile of the portfolio include onboarding assets, managing them internally and using active management across multiple asset classes.

Using active management in equities, for example, produced “a very good excess return” over its benchmark, even in a year which produced negative total returns.

“Active management allowed us to find the right kind of portfolio for the environment we are going into,” Chaudhari says. “This decision [to move towards active management] was made back in 2019-20. We didn’t anticipate the pandemic or the interest rate cycle, or anything like that. We basically brought in our data and made sure our risk was equally distributed across different sectors, using active management to find the right risk/reward profile.”

In fixed income, utilizing an active framework aided the pension system to similarly outperform benchmarks in 2022. Chaudhari said that in response to an interest-rate-hiking cycle pursued by the Federal Reserve, the pension system moved from a 100% high-yield allocation to a 50-50 allocation between high-yield and loans.

“We protected value [by switching the fixed-income allocation] because loans did so well,” Chaudhari says. “Below-investment-grade loans did phenomenally well last year because they are floating-rate instruments, and rates went up.”

For Chaudhari, 2022 confirmed that the name of the game in effective risk management is diversification.

“Even in the liability-driven investment part of the fixed-income book, where we are hedging our liability risk, we are looking to do diversification there,” Chaudhari says. “Long-duration corporate credit and corporate offerings were the traditional way of hedging liabilities. But there are so many other things that you can do, and you can start using some alternative assets there, and we are starting to diversify that side of the book.”

—Dusty Hagedorn