The $3.8 billion City of Seattle pension fund’s move to a liability-aware investment strategy worked in the plan’s favor during the difficult investment environment of 2022, when both equity and bond returns dropped.

For CIO Jason Malinowski, discussions with the fund’s investment committee and board led to an asset-liability study and, ultimately, an investment framework that reoriented “the concept of risk from conventional asset-only measures like return volatility, to plan-level measures like funded status volatility,” which in turn has led the plan “to introduce long-dated fixed income to our strategic asset allocation,” starting with a 5% allocation.

In 2022, the liability-aware approach saw returns increase due to higher interest rates, lower market valuations and the related reduction in the system’s liabilities.

“In our discussions with the investment committee and board, we overcame the challenge of poor short-term asset performance by reorienting the discussion to that of the total plan. We worked with our consultant [NEPC] to introduce a funded status monitor in our quarterly reporting, which presents the actuarial funded status along with a ‘true’ market funded status that accounts for changing [expected return on assets],” Malinowski says. The reframing, he said, “helped us… to better understand plan success/risk and stay the course in challenging market conditions.”

In practical terms, the change in approach, at least in part, stems from Malinowski’s self-described “deep appreciation and healthy skepticism of conventional risk measures and statistical techniques.”

The new investment blueprint, developed with J.P. Morgan Asset Management, has enabled the pension fund to focus the portfolio on long-term equities, real assets and long-term fixed income, including moving the core bonds allocation to long-term Treasurys.

“The outcome: a reduction in the volatility of [the plan’s] funded status and of the volatility of contributions,” says Malinowski, who joined the fund as CIO in 2014 after working as the managing director and head of risk and quantitative analysis for alternative investments at BlackRock.

Changing the thinking about the long-term goal of pension-fund investing to be more liability-aware “uncovers opportunities for improved plan governance by reducing the likelihood of overreacting to exceptionally strong or weak asset performance,” Malinowski says.

During his tenure, the pension’s funding ratio has increased to 76% from 66% on an actuarial-value-of-assets basis, despite the investment return assumption being reduced to 6.75% from 7.5% between January 2015 and June 2023. The overall portfolio market value during Malinowski’s tenure, September 2014 to June 2023, increased to $3.8 billion from $2.3 billion. Returns over the most recent one-, five- and 10-year period have been 7.30%, 7.31% and 7.65%, respectively.

—Amy Resnick