Corporate Pension Sponsors’ Use of OCIO Services Is Growing, While Interest in Risk Assets Wanes, Research Finds

Vanguard’s 2022 pension sponsor survey explores how the global pandemic, market volatility and rising inflation influenced pension decisionmaking.

Vanguard surveyed decisionmakers at 117 organizations that sponsor corporate pension plans representing a wide range of plans in terms of size, status, and plan design, the participants responding sponsored defined benefit plans that held between $20 million and $2 billion in assets. The survey found that the current macroeconomic climate has made managing and mitigating risk paramount to plan sponsors. To do so, plan sponsors have “adjusted their plan design, increased their fixed income allocation, lengthened fixed income duration, adopted glide-path strategies with the intent to further increase fixed income allocations as funded status improves and transferred liabilities to plan participants and insurance companies,” the Vanguard report stated.

The survey also found that corporate pension funds’ usage of outsourced investment has exploded in the past decade, with 49% of respondents saying they employ an OCIO service, compared to 33% only 4 years ago.

For more stories like this, sign up for the CIO Alert newsletter. 

“From 2015 to 2021, the global OCIO market nearly doubled: from $1.3 trillion assets under management to more than $2.5 trillion, with defined benefit pension plans representing the largest share of the OCIO market,” the report summarized.

Interestingly, the top reasons given for the usage of OCIO services is no longer “having insufficient internal resources” to properly steward investments, as it was in previous iterations of the survey. Instead, respondents said they are using OCIO services due to the attractive cost/fee structure of OCIO services and the ability to maintain internal control over investment decisions.

In detail, the 2022 survey found, 91% of respondents reported that their tolerance for an acceptable level of downside variation in funded status was 10% or less, while 46% of respondents said that their tolerance for funding status volatility is less than 5%.

Respondents reported that a 30% allocation to return-seeking assets and a 70% allocation to liability-hedging fixed income resulted in an 11% downside variation, according to risk analysis from Vanguard.

Vanguard observed the difference between stated objectives and actual asset allocation, writing, “91% of respondents state that only a 10% downside variation is acceptable when only 16% of all plan sponsors have adopted an asset allocation that aligns with this level of downside risk (20% or less in return-seeking assets and 80% or more in liability-hedging fixed income).”

Vanguard suggested that plan sponsors could better align their expectations and risk-variance by either keeping their stated risk tolerance unchanged and shifting their asset allocation from return-seeking assets to liability-hedging fixed income or adjusting their risk tolerance, keeping the portfolio unchanged and accepting the additional downside risk in exchange for the potential of higher equity returns.

In 2022, nearly 80% of respondents stated they intend to make a change to their pension plan, continuing an upward trend in that response rate. Some 18% of respondents are considering a change in benefit formula, six times more than the 3% who were doing so in 2018, while 32% of respondents said they are exploring a risk transfer, removing liability and risk from the pension via the purchase of a group annuity or offering a lump-sum window. According to respondents, they are considering these options primarily to cut costs, reduce cost volatility and to limit the impact the pension has on a company’s annual financials.

Obtaining full funding was the primary objective for pension plan sponsors, which Vanguard writes “is a worthy goal for all sponsors, as their funded status represents their ability to pay benefits to plan participants and a sign of the plan’s overall financial health relative to the sponsor’s financial position.”

The top concern to sponsors, similarly, was risks to funded status. Vanguard highlighted that the increasing costs of maintaining a pension was also of chief concern to sponsors, citing the dramatic rise in PBGC variable-rate premiums, “from less than 1% of unfunded vested benefit to almost 5%, along with the rise in the PBGC flat-rate premium from $35 per participant in 2010 to $88 per participant in 2022.”

As more corporate pension funds seek to improve funded status and reduce funding volatility, the amount they have allocated to fixed income has grown to exceed the average amount allocated to other asset classes. “Fixed income allocations have increased from 38% in 2008 to 51% at the end of 2021. While equity and other allocations have declined from 62% to 49% over the same period,” the firm wrote, based on data reported in annual filings.

Data from the survey show that most corporate pension funds began incorporating liability-driven investment strategies in the past five to 10 years, while the overall percentage of respondents who indicated that the pension’s investment policy statement reflected LDI strategies remained unchanged since 2018.

Of the 23% of respondents who are not using an LDI strategy, none are considering implementing one in the future, with sponsors saying they do not believe the strategy is viable for their plan at the moment.

Vanguard wrote that for defined benefit plans, especially those that are closed or frozen, a de-risking glide path is recommended. “Plans should follow their glide path and be disciplined in taking de-risking steps as soon as possible after they reach a trigger point [in funding status] rather than overriding the asset allocation change to time the market,” the firm wrote in its report.

The survey data depicted that in LDI strategies utilized by plan sponsors, 91% have fixed income duration exposure that is greater than, or equal to, the liability duration of the plan.

Vanguard surveyed defined benefit plan sponsors that had between $20 million and $2 billion in assets.

LDI Push to Lower Stock Exposure Reaches Its Destination

WTW Backs Hibernation, OCIO, ESG and Diversification in Recommendations for 2023

Tags: Defined benefit (db) pension plans, Funded Status, Funding Status, LDI, OCIO, Pension, Plan Sponsors, Survey, Vanguard

Benjamin Cotton

The Pennsylvania Public School Employees’ Retirement System has named a new CIO, Benjamin Cotton, who managed pensions for the auto industry, filling a job that has been vacant for a year following a controversy.

Cotton, a senior managing director with the United Auto Workers’ Retiree Medical Benefits Trust, will assume the PSERS job and oversee its investment assets, which totaled roughly $68 billion as of last September. He starts January 16.

“It’s an honor to join one of the nation’s oldest and largest public pension funds,” Cotton said in a statement. “I was drawn to this job by the board of trustees’ dedication to continuous improvement to keep the system healthy and viable for over 500,000 public school employees and retirees.” His annual salary will be $515,000.

Cotton succeeds Jim Grossman, who stepped down as the PSERS CIO in December 2021 after the pension plan revealed its performance figures for 2011 through 2020 were inaccurate. The reported average returns came in just above a 6.36% target, which had allowed the plan to avoid triggering additional contributions from beneficiaries. Once the shortfall came to light, they had to contribute extra money into the fund.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The plan has not been much of a performance champ lately. PSERS’ investment return for fiscal 2022, ending last June 30, was just 2.2%—a low number it attributed to economic turbulence and the Ukraine war, its financial report indicated. The plan is funded at just less than 60%. The average funded status for U.S. public plans for the fiscal year was 78%, per the Equable Institute.

Some on the PSERS board thought Grossman, by reducing the plan’s exposure to U.S. stocks, had missed a bull-market opportunity and should have produced better results. The Department of Justice conducted probes into the exaggerated performance report under Grossman’s tenure, but found no wrongdoing. The fund’s investment consultant, Aon, took responsibility for the accounting error.

Cotton, a Marine veteran, served in Saudi Arabia and Kuwait during the Gulf War of 1990 and 1991. At the UAW, he invested assets and administered health-care benefits for more than 800,000 automotive industry workers and their dependents. As a founding member of its investment team, Cotton helped expand assets from to $60 billion from $40 billion.

Before the UAW, he worked at Ford Motor, where he helped manage more than $55 billion in pension, insurance and cash-related investments. A graduate of Midwestern State University in Texas and the Thunderbird School of Global Management in Arizona, he recently completed a doctoral program on leadership and learning through Vanderbilt University’s Peabody College.