Many corporate DB plan sponsors have have begun to de-risk their plans by adopting some form of a liability driven investing (LDI) approach. Despite this trend, there remains a significant subset of corporate plans, and most public and Taft-Hartley plans that haven’t begun to de-risk their plans.
According to Prudential the top 100 corporate plans saw their funded status decline by roughly 50% from 1999 to the present (135% funded to 83% today) while at the same time they contributed a collective $600 billion in contributions. Oh, my!
There has been significant volatility in both funded ratios and contribution costs in the last 15 years, and a lot of it has to do with plans trying to achieve an ROA objective instead of providing the promised benefit at the lowest cost possible. Traditional approaches to asset allocation inject significant risk into the process.
Adopting a cash flow matching strategy for near-term retired lives does not impair a plan’s ability to improve funding, as the yield on the cash matching portfolio will far exceed the yield on a Barclays Aggregate portfolio.
Don’t continue to live with the excessive volatility of traditional asset allocation approaches, which may compromise the stability of your DB plan, when successful, time-tested approaches exist that will stabilize your funded status on annual contribution costs.