A run-up in the markets is giving plan participants a reason to open their statements again. Pension funded ratios of the S&P 1500 pension plans have climbed 6% to close at 86%, according to a Mercer report. That represents 12% growth from year-end 2012. Aggregate pension deficits have been cut by more than half from the end of 2012 – down from $557 billion to $269 billion.

Much of this, besides the run-up in the markets, has to do with de-risking by plan sponsors, notes Jonathan Berry, Partner in Mercer’s Retirement Business. But de-risking can come in two forms. The first, he notes, has to do with holding onto assets and following a Liability Driven Investing (LDI) strategy – investments such as higher fixed income allocation or longer-term fixed income allocation so assets and liabilities can be working in line with one another.

“If you’re an adviser to a pension plan you need to be knowledgeable about the fixed income market, the LDI market and how those solutions can be customized to fit a given plan sponsor’s needs,” he explains. And while the “traditional” knowledge of equity markets is important, Berry emphasizes the need to make fixed income an important part of the adviser tool kit.

Berry adds the movement by plan sponsors, anecdotally, has been between one-third to one-half have incorporated some kind of LDI or de-risking strategy with the numbers moving up over time.

A second form of de-risking comes in the form of transfers. Plan sponsors can either cash-out – offering lump sums to plan participants or buy-outs by purchasing annuities on behalf of plan sponsors. And while they have not been as popular, “they will almost certainly take off over the next few years especially as the funded status [continues] to improve.”

Again, a move in this direction would certainly dictate some options advisers might want to consider. “If you are an adviser on how to invest assets, a lot of companies will be giving assets away either to the participant or an insurer so that changes the dynamic for someone in that space,” Berry stresses. And, he adds, if you are an adviser on pension plans, one needs to be conversant on how those transfers fit into the dynamic.

With volatile markets, and sponsors wanting to earn their way out of bad returns, “it is headed this way,” notes Berry, and most plan sponsors will have made serious de-risking moves, whether on the LDI path or risk transfer path or a combination of both.

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. joel@kranccomm.com.


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