Northern Trust: US Institutional Plan Sponsors End 2011 With a Bang

(February 1, 2012) — Institutional investment plan sponsors in the Northern Trust Universe gained 4.5% at the median in the fourth quarter of 2011 and a median return of 0.8% for the year.

According to the third-largest independent US custody bank, a surge in US equities created a positive ending to a mixed year for most plans. “Global market volatility contributed to an up-and-down year for institutional plan sponsors in 2011, with two quarters of moderate gains followed by a nearly 10 percent drop in the third quarter and a sharp recovery at year-end,” said William Frieske, senior performance consultant, Northern Trust Investment Risk & Analytical Services, in a statement. “Last quarter’s positive results were in line with historical trends in the Northern Trust Universe, with fourth quarter median returns typically being the highest in the calendar year.”

While institutional investors in the Northern Trust universe achieved a median return of just under 1% for the year, the results differed by segment. Corporate ERISA Pension Plans gained 2.3% at the median while the median Public Fund was up by 0.9% and the median fund in the Foundations & Endowments segment was down by 0.6% for the 12 months ending December 31, 2011.

In terms of asset allocation, Northern Trust’s research showed that corporate pension plans had the largest allocation (nearly 35% at the median) to fixed-income in the third quarter, along with the largest allocation to US equity (nearly 37% at the median). Public Funds performance suffered from a larger allocation to International Equities (16%) while Foundations & Endowments’ larger allocation to hedge funds (7%) hurt performance.

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The Northern Trust Universe represents the performance of about 300 large institutional investment plans in the US, with a combined asset value of approximately $689 billion, which subscribe to Northern Trust performance measurement services.

Last year, Northern Trust found that strong equity performance coupled with the success of active managers contributed to its success. “What we’ve seen in our universe is that a lot of our plan sponsors have been overweight in small to mid-cap stocks, which have done particularly well,” Frieske told aiCIO in April of last year. “The strong performance of active managers has helped that gain,” he added.

According to Frieske, the superior performance of active over passive managers contrasts with assertions by prominent figures in the investment industry, such as Vanguard. “We’ve proven period over period that active managers are a good idea, as our universe has demonstrated that the median manager — the guy in the middle of the pack — is better than the index,” he said.

Because of the size of contributions, plan sponsors may be more sensitive to their timing than in other years, research by Russell Investments shows.

(February 1, 2012) — Many pension plan sponsors will make larger contributions to their pension plans in 2012 than they have in previous years, according to new research by Russell Investments.

As a result of institutional investors putting more and more money into the market at the same time, investors should be aware of the danger of ‘crowded trades’ distorting the market as investors try to buy and sell simultaneously, Bob Collie, chief research strategist of Russell’s Americas Institutional business, told aiCIO. “Overall, the general need for higher contributions among plan sponsors is not surprising as many factors have aligned,” he said, citing falling interest rates, higher liabilities, and the Pension Protection Act’s (PPA) redefinition of shortfall requirements. “Perhaps the single most important factor is the way that the PPA has redefined how plan sponsors must make up a shortfall. When there’s a shortfall, the PPA now says plan sponsors have seven years to make it up. Previously it was roughly double that. So it means contributions are now much more responsive to changes in the market situation,” Collie said.

According to the newly released paper — titled “Strategies for large pension plan contributions” — Russell anticipates most plans to allocate contributions in three major ways:

1) In line with the current strategic asset allocation policy — the default approach for plans that do not have a liability-responsive asset allocation (LRAA);

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2) Entirely to risk-hedging assets; or

3) In a way that brings the new allocation in line with the next step of an LRAA schedule.

Russell’s research follows a report released in December by Mercer that showed that the outlook for 2012 pension plan contributions and expense is bleak. “Even though discount rates moved somewhat higher during November, they are likely to be in excess of 40 basis points lower at the end of this year than they were at the end of 2010,” said Kevin Armant, Principal in Mercer’s Financial Strategy Group, in a statement. “Because equities have also underperformed expectations, corporations who use a December 31 measurement date will likely see larger pension liabilities on their balance sheet, as well as higher 2012 pension expense.”