BOSTON -- November 13, 2019 -- NEPC, LLC one of the largest independent, research-driven investment consulting firms, today announced the results of its latest survey of corporate and healthcare defined benefit plan sponsors. The survey focuses on plan sponsors’ economic outlook, utilization of risk reduction strategies, and how they anticipate changing their asset allocation and investment strategies in 2020.
In an environment where corporate pensions are experiencing increased costs and declining discount rates, the survey reveals plans’ funded statuses have improved since 2017. About 60 percent of plans have a funded status greater than 90 percent in 2019, compared to just 46 percent two years ago. These better-funded plans have embraced liability-driven investing (LDI), glide paths, and liability reduction strategies. About three-quarters of plans with a funded status above 90 percent have utilized LDI and two-thirds have 40 percent or less of their assets allocated to equity. Among plans that use LDI, 44 percent have an allocation of 51 percent or higher, compared to just 37 percent and nine percent in 2017 and 2011, respectively.
“The correlation between strong funded status and the use of LDI illustrates that risk management in the form of LDI works to reduce funded status volatility in a declining interest rate environment,” said Brad Smith, Partner in NEPC’s Corporate Defined Benefit Group. “While the use of LDI has remained consistent with prior years, we’ve found that the allocations to LDI have increased significantly over the past two years and are a key contributor to protecting funded status in this market environment.”
Additional top findings of NEPC’s survey include:
- A supermajority of plan sponsors (84 percent) believe a recession is on the horizon and is likely to occur in the next three years. Half of those respondents expect a recession in just 12 to 18 months. In line with recessionary fears, many defined benefit plan sponsors are bearish on the stock market (58 percent) and believe discount rates may be the same or lower over the next 12 months (63 percent). When asked to name the greatest threat to their portfolios, plan sponsors are equally split between geopolitical tensions (30 percent), political uncertainty (29 percent), and Federal Reserve action (28 percent).
- Plan sponsors have significantly lowered their long-term return assumptions. One-third of respondents have a return assumption of 6 percent or less compared to 20 percent in 2017. The amount of plan sponsors with a return assumption of 7.5 percent or more has declined. Just two years ago, 33 percent of respondents expected that level of returns. In 2019,the number was 21 percent.
- Lump sums remain the most popular liability risk reduction strategy, eclipsing plan terminations and annuities. Eighty percent of respondents have already implemented (54 percent), or plan to offer (26 percent) lump sums. Of the 26 percent that plan to offer lump sums, 67 percent plan to offer them to retirees due to the IRS guideline change.
- Sixty-two percent of plans, including both open and closed plans, are still accruing future benefits. Plan status remained fairly consistent with prior years. Respondents indicated 38 percent of plans are frozen, 34 percent are closed, and 28 percent are open.
- An increased number of plans are unsure if they will stay open (23 percent versus 12 percent two years ago), potentially due to growing costs and interest rate volatility. Consistent with prior years, about 15 percent are planning a full plan termination and 35 percent of state it may occur over the next five to seven years. Twenty-two percent considered but rejected a plan termination and 78 percent cite costs to purchase an annuity as the reason. here was a small increase to those planning or implementing hibernation strategies in 2019 (20 percent) compared to 2017 (11 percent).
NEPC’s survey also demonstrates that traditional alternative investment strategies remain popular, as about two-thirds of respondents (65 percent) have an allocation to alternative investment strategies in 2019. Among plan sponsors who are actively investing in alternatives, 40 percent utilize hedge funds, 38 percent invest in private equity, and 33 percent have an allocation to real assets.
While plan sponsors have placed a strong emphasis on evaluating risk reduction strategies, they have not been widely implemented yet. The most popular risk reduction strategy utilized today is defensive equity, which 22 percent of respondents have implemented. Factor-based equity strategies and tail risk hedging are less commonly used, leveraged by just 9 percent and 5 percent of respondents respectively.
The percentage of healthcare and corporate defined benefit plan sponsors incorporating environmental, social, and governance (ESG) strategies has grown compared to NEPC’s 2018 ESG Survey. Eleven percent incorporate ESG strategies today versus six percent in 2018. However, interest appears to be waning as 16 percent of plan sponsors are considering ESG compared to 28 percent in 2018.
About the Survey
This survey was conducted online by NEPC’s Corporate Defined Benefit Group in September 2019. The survey had 121 respondents across plans of different sizes and focus, including corporations, healthcare organizations, and others. Copyright is held by NEPC.
About NEPC, LLC
NEPC is an independent investment consultant and private wealth advisor with more than 30 years’ experience creating research-based, bespoke investment portfolios that align to the goals of its clients and their constituencies. Combining a proprietary research team dedicated to the long-term challenges facing institutional and high-net-worth investors with our unique client-centric model, NEPC builds investment portfolios defining the future of finance.
We service over 380 retainer clients with $1.1 trillion in assets from our offices in Boston, Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Portland, and San Francisco with a forward-thinking approach to solving the most complex challenges facing the investment industry. To learn more about NEPC, please visit https://www.nepc.com/.