PlanSponsor magazine is reporting on the improved funded status of DB plans following strong asset growth that offset a more modest rise in plan liabilities during October. Several organizations, including Ryan ALM, have “pension monitors” that are all reflecting similar improvements. In fact, each of the studies is estimating a funded status for corporate America in the neighborhood of 94% to 95% funded. In most cases, the reduction in the funded ratio during September’s market sell-off in equities was mostly reversed during the last month.
Now what? We believe that asset allocation strategies need to be dynamic or responsive and that decisions should be based on the plan’s funded status, with better-funded plans taking risk off the table, while those less-well funded maintain more risky implementations. Importantly, being responsive does not mean tactical. Trying to “time” market moves has proven incredibly difficult for nearly all market participants. Plan sponsors and their advisors should take full advantage of the improved funding to lock in the gains. We espouse using a cash flow matching (CDI) implementation to SECURE the promised benefits and plan expenses chronologically for as far out as the allocation will allow. This enables the plan to maintain exposure to more risky assets, as they now can grow unencumbered, but they are no longer a source of liquidity.
As the plan’s funded status/ratio improves port additional “profits” (portable alpha) from the alpha or risk assets to the CDI portfolio extending the period of Retired Lives liabilities that are being defeased. This process secures more of the promised benefits and reduces the volatility in the funded status that we’ve witnessed on multiple occasions during the last couple of decades.