U.S.-based defined benefit pension plan sponsors are increasingly looking to assess their liability-driven investment strategies as they reach fully funded statuses, according to a new study by Coalition Greenwich and commissioned by Franklin Templeton.

The study found nearly three-quarters (73 per cent) of pension plan sponsors reported funding ratios of 100 per cent or higher, while the rest had funding ratios above 110 per cent. Roughly half of respondents said they’re concerned about “substantial overlap in holdings” among their LDI managers, while 30 per cent said they’re contemplating a change to their LDI strategies. Among the plan sponsors considering a change, 44 per cent said they want to improve downside risk protection.

Timothy Quagliarello, senior client advisor at Franklin Templeton, says there’s a clear bias against higher risk beta credits as corporate pension plans reach healthier funding status levels. While the strategy has worked in the past, he notes, now that corporate DB plans are overfunded, they may be exposed to different risks if they leave the same strategies in place.

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“[Corporate pension plans are] now exposed to asymmetric risks — like having an alpha-seeking approach can add marginally to the pension surplus, but also exposes the pension to serious downside consequences if spreads widen and the pension falls back into underfunded territory.”

Under this new funding status reality for U.S. pension plans, Quagliarello expects to hear increasing conversations about how to leverage risk moving forward. While pension risk transfer has been critical for years, plan sponsors may soon wonder about the cost and operational intensity of the process, he adds. Instead, he suggests there may be potential for pension plan sponsors to consider reducing liabilities at the margins in addition to a partial pension risk transfer over a defined period of time.

The study asked pension plan sponsors what top qualities they look for in LDI managers, with a majority (90 per cent) citing risk management, followed by fees and knowledge of key pension risk management elements (each at 70 per cent).

“Based on the discussions we’ve had with plan sponsors, we think those sort of diversifying managers that provide elements of downside protection when risk markets sell off are sorely lacking in the current multi-manager lineups,” says Quagliarello.

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