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Risk Management for U.S. DB Pensions Plan Sponsors

The best recent papers on pension risk management

Recent equity market volatility brings to light the importance of risk management practices.  Plan sponsors have to contend with not only asset allocation decisions and the plan's overall funded status, but hedging policies, VaR, sequencing risk, and a host of other concerns as they attempt to manage to the specifications of a particular glide path.

The following list of papers represents some of the best recent content on Savvy Investor on the topic of risk management for defined benefit pensions. 

pensions risk

Pension Risk Management: Three Questions Plan Sponsors Should Ask (Capital Group, Aug 2018)
Plan sponsors should consider pension risk asymmetry, the level of interest rate risk that is hedged and unhedged, and whether they are being appropriately compensated for the risks they have undertaken. 

Liability Driven Investing Q3 2018 Summary (Fidelity Investments)
(For compliance reasons, this paper is only accessible in the United States)
Fidelity models hypothetical pension plans with a range of allocations and then examines how each performed over the most recent quarter.  For the year, funded statuses have improved by around 5-6%.

Stars Aligning For Corporate Plans to Take De-Risking Actions (GSAM, Oct 2018)
As evidenced by October's market volatility, it is important for plan sponsors to have a framework for altering their portfolios (and potentially de-risking) when funding levels are high.

Constructing a Glide Path for Defined Benefit Plans (Rocaton, 2018)
What is a glide path?  Rocaton explains the concept of the glide path for the benefit of plan sponsors that are considering adopting and implementing one.  

Capital-Market-Aware LDI: Actively navigating the de-risking journey (Fidelity, June 2017)
(For compliance reasons, this paper is only accessible in the United States)
Plan sponsors that adopt a market-aware LDI approach may be better able to mitigate risk and manage an effective glide path. 

2018 Global Survey of Accounting Assumptions for DB Plans (Willis Towers Watson)
Willis Towers Watson looks at economic assumptions used in defined benefit pension plans, including data on mortality. 

Liability-Hedging Handbook: A Guide to Best Practices for U.S. Pension Plans (Cambridge Associates, 2018)
This report lists best practices for DB plans and other key considerations for liability hedging portfolios.

Liability-hedging strategies for pension plans: Close may be best (Vanguard, 2018)
Vanguard recommends pensions engaging in liability-driven investing consider bond funds as opposed to portfolios of individual securities, due to their diversification benefits, flexibility, lower cost, and other potential advantages.

A Primer for Investment Trustees: Understanding Investment Committee Responsibilities(CFA Institute Research Foundation)
Trustees take on many responsibilities, including setting investment and governance policy, understanding the fund’s mission, establishing objectives, and assessing performance. This primer discusses issues relevant to investment trustees.

Identifying Retirement Plan Risk: An Important First Step to Managing It (Segal Consulting, 2017)
This article by Segal Consulting is devoted to identifying risk in retirement plans. It looks at risks associated with both DB and DC plans.

Multiemployer U.S. Defined Benefit (DB) Pension Plans: A Primer (CRS, 2018)
(For compliance reasons, this paper is only accessible in the United States)
This paper explores multiemployer DB pension plans, their governance, funding levels, and the related aspects of the PBGC. 

LDI Implementation - Managing Surplus Volatility by Reducing the Drawdown Risk of Growth Assets (QMA, 2016)
This paper by QMA recommends that plan sponsors prioritize the trade-off between surplus volatility and funded status, and examine their growth assets for ways to reduce surplus volatility.

King of the Mountain: The Shiller P/E and Macroeconomic Conditions (The Journal of Portfolio Management, 2018)
In this paper for the Journal of Portfolio Management, Robert D. Arnott, Denis B. Chaves, and Tzee-man Chow examine the interplay that exists between the Shiller P/E ratio and the macroeconomy.

Pension De-Risking: Seizing the Inflection Point (GSAM, 2018)
U.S. corporate defined benefit pension plan funded levels are at an important inflection point –the aggregate funded status of U.S. DB plans is at its highest level since 2013 and close to its highest level since the 2008 financial crisis. 

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