Ever wonder what DB pension plans south of the 49th parallel are doing to stay solvent? Dan Tremblay, a liability-driven investment strategist with Pyramis Global Advisors speaking yesterday at the Pyramis Global Advisors Fall Forum in Toronto, noted two ongoing trends that pension plans have adopted to stay above water in this turbulent economy.
First, plans are looking at terminating a portion of their liabilities, he said, noting the recent actions of Verizon. In October, Reuters reported that Verizon has plans to transfer a portion of its pension obligations ($7.5 billion) to an insurer to remove the retirement benefit from its books. Other examples include General Motors, which announced the elimination of $26 billion in pension obligations to an insurer in June, and Ford, which eliminated its almost $18 billion in obligations through a lump sum to plan members.
Tremblay said that these terminations for Verizon, General Motors and Ford represented only 25% of their liabilities on average. “It doesn’t have to be all or nothing,” said Tremblay, adding that pension plans can just dip their toe in the water. In fact, before he arrived at the forum, dozens of plans had contacted him asking about this very process.
However, that can be an expensive initiative. “Insurance companies are charging a premium,” said Tremblay. But plans are still making the decision to do this because they want to take this risk off their books. “They’re doing it incrementally.”
The second trend involves those plans that are not terminating pension obligations, but rather looking to do more with less. Many of cases of this can be seen the public sector.
“They’re looking for higher yields to meet their return objectives that could be north of 7%. Realistic or not, they have to try to meet this goal,” Tremblay says. A traditional bond mandate with a heavy government allocation is not going to meet this goal and will likely perform poorly when rates rise. “As a result, plans are looking to move away from traditional benchmarks and are expanding the universe into credit-intensive sectors that are more yield and less rate sensitive, such as high yield, emerging markets and some diverse mortgage sectors.”