time-sensitive or event-driven. I would think
that it would be more likely to be event-driven, allowing the portfolio to increase
the liability-hedging assets as rates increase
and/or our funded status improves. We will
still need a certain percentage of the assets
to continue to be return-seeking in nature.
It is still important to generate investment
income to contribute to the reduction of the
funding gap for this plan.
CIO: What are your biggest challenges
and considerations so far?
Pellegrino: Since we have a shortfall in all
three plans—the plan which is closing, as
well as our two non-union plans that remain
open—we need to identify the appropriate
strategy that allows us to better hedge our
liability streams as they become more certain,
but also maintains enough return-seeking
assets to generate sufficient returns to help
offset the near-term growth of the liability.
Today, we manage the assets for all
three plans in a master trust structure, but
once the retirement plan becomes completely
frozen, we should end up with a different
strategy for each plan. The non-union
plan will potentially move quicker towards
de-risking or LDI strategies. Since two of
the three plans will remain open and the
third has a five-year window, we still need
to be concerned about our ability to generate
adequate returns, especially over the near-term, to help reduce our funding gap and
offset service costs.
CIO: You’re just starting to consider
LDI, or are you well into discussions
Pellegrino: We have been addressing
our pension obligations for the retirement
(non-union) plan since 2008, implementing
changes such as the transition to a cash
balance structure, offering term-vested
payouts, closing the plan to new entrants,
discretionary funding when it makes sense,
and now announcing the plan will be frozen
in 2023. LDI has always been part of the
discussion. It is the freezing of the plan that
has made this a priority for the near future.
CIO: What’s your method of choosing
your LDI strategist, and what do you
find has worked for you when choosing
managers in the past?
Pellegrino: We currently have strategic
partners in the space who will help us in
identifying and implementing the right strat-
egies. These relationships were established
over the last four to five years with the goal of
having them in place when we would be in a
position to move forward with LDI. Because
we have what we believe are the right rela-
tionships, our LDI strategy will most likely
be implemented by our existing managers.
We also have a short list of potential new
managers that can be added if needed. Since
there is a possibility the fixed-income alloca-
tion will increase significantly over the next
three to five years, it may be necessary to
expand that list, but we are not ready to do
that at this time.
CIO: Is there any particular area of
expertise you’re looking for?
Pellegrino: Although our core fixed-income portfolio includes both US Treasuries and Long Corporate Bonds, we actually treat them as separate portfolios. So,
even if a manager is given dual mandate,
they manage each piece separately. Once
we identify the appropriate strategy going
forward and determine the timing of its
implementation, we can then revisit our
manager line up and decide where we need
to add capacity. Until then, we won’t know
what specific expertise is needed.
CIO: You’re known for delivering
alpha. What are you watching now?
Pellegrino: Since 2012, almost half of the
money we’ve put to work in private equity,
credit, and real estate has been in custom or
bespoke mandates. This gives us better visibility into the underwriting process as well
as more control of the economics. These
strategies have worked well, but in today’s
environment, they are much harder to find.
We have done something similar with
our global equity allocation and currently
have almost half of that portfolio in custom
beta strategies. Since 2010, the custom
beta strategies have provided significant
value-add to the overall portfolio. Our
strategy for the remainder of the portfolio
is prioritizing liquidity, and we continue to
manage our hedging and risk programs.
We are always looking for new opportunities, so I can’t identify one specific thing
that we are watching. The most important
thing for our team is to be in a position to
react quickly when opportunities present
CIO: Are there any opportunities that
you’re specifically watching for when
it comes to liability-driven investing
or de-risking investments?
Pellegrino: From an asset perspective, it’s
the timing of deploying additional assets,
and the current level of rates has a lot to do
with that. From a balance sheet perspective,
it is more about funded status and timing
of contributions. So, as rates rise and/or
funded status improves, we would expect to
start increasing our allocation to LDI strategies. Although LDI strategies are great for
preserving funded status, there is the risk
of incurring losses if interest rates rise. Any
strategies that help preserve capital in that
environment may be worth exploring.
CIO: What were some of the considerations in determining the five-year
window to freeze the plan?
Pellegrino: The primary reason was to
enable affected employees to plan for the
change as they consider their retirement
needs. Another important objective was
to minimize the number of significantly
affected employees, and a third goal would
be to remain competitive in the marketplace. The company is committed to offering
above-market benefits to attract and retain
CIO: Are there any chief investment
officers you’re particularly looking
to, who did it right with their LDI
Pellegrino: As a working group member of
CEIBA, we have access to many of the top
CIOs in the Corporate DB space. Although
I try to learn from all of them, quite a few
are much further along in their LDI journey.
I have already started and will continue to
tap into their expertise as we formulate a
strategy and move forward with our LDI