A well-known consultant told CIO recently, “To beat the market in the long-term, or to beat your peers, you have to be wrong in the short-term.” When it came to liability-driven investments (LDI), although he was right on disagreeing with market consensus, he lost
quite a few clients. Such is the pain of LDI.
Yet, according to our annual LDI survey, 2017 respondents saw some painful trends reversing.
Average funded ratios are up in every way measured. On a GAAP/PBO basis, (the most popular
measurement), funded ratios rose to 91% on average, up from 85% last year.
This may be partially because MAP- 21 pension relief has been dwindling: the artificial
MAP- 21 rates, which allowed employers to defer some pension funding and made pensions seem a
bit more funded in the past, have come down, and the expense of having an underfunded pension
has increased due to rising Pension Benefit Guaranty Corporation (PBGC) rates. Subsequently,
many have rushed to fund their plans.
“For some of our clients, the PBGC premium is their biggest expense, it’s more than their
asset management fees, it’s more than their actuarial fees, their administration fees combined,”
said Thomas Schatzman, senior vice president and institutional consulting director for Morgan
Stanley-Graystone. “And so you get no benefit for that expense, it’s just lost money. It doesn’t help
your beneficiaries; you’re just subsidizing poorly funded plans.”
This year also saw a reversal in the trend of more DB plans closing, as 28% are open this
year to new entrants versus 17% last year, and 34% are closed to new entrants versus 41% last
year. Also, 25% plan to keep their plans open (versus 16% last year) and just 9% plan to close
their plans (versus 14% last year).
Of our respondents, 64% plan to continue to manage/de-risk (versus 58% last year).
LI A BILIT Y
DRI V EN
IN V ESTING