Survey of Plan Sponsors Shows:
- Markets as Volatility and Trade Tensions Linger
- Plan Sponsors Favor Private Equity and Hedge Funds to Diversify Portfolios
- Majority of Plan Sponsors to Take Conservative Approaches to Managing Governance Priorities
BOSTON, November 13, 2018 – NEPC, LLC (www.nepc.com), one of the industry’s largest independent, full-service investment consulting firms, today announced the results of its latest survey of defined benefit plan sponsors. This survey focused on plan sponsors’ outlook on the U.S. and global economies and how they anticipate changing their asset allocation and investment strategies in 2019.
Throughout 2018, geopolitical tensions, Federal Reserve action, the possibility of a recession and other factors have created an unusual level of economic uncertainty, resulting in market volatility. The survey results suggest that plan sponsors are using this tumultuous time to prepare for the future, by either adopting a wait-and-see approach or actively taking steps to de-risk their portfolios. What’s more, many respondents plan to increase allocations to alternative assets in 2019, suggesting they expect them to outperform traditional assets and are therefore reducing uncompensated risks.
“Our survey results indicate that plan sponsors are almost evenly split on whether their course of action in 2019 should be to begin preparations for an economic downturn or recession, or to stick with their current strategy and continue capturing returns for as long as possible,” said Michael Valchine, senior consultant in NEPC’s Corporate Practice.
When asked how they will address plan costs and liability in 2019, the majority (58%) of the DB plans surveyed said staying the course is their top priority. Respondents also cited reducing fixed and variable rate PBGC premiums and increasing contributions as key considerations. Half (52%) of respondents said closing and/or freezing their plans is their lowest priority.
The survey also asked DB plans about their preferred asset allocation strategies, and two-thirds of respondents indicated they’re taking safer approaches in 2019. A third (33.5%) plan to focus on risk mitigation strategies, while another third (33.5%) said they won’t make any meaningful changes to their asset allocation strategies.
“As always, we advise DB plans to take a long-term horizon and avoid being too reactionary to day-to-day market moves and other events,” Valchine added. “At the same time, especially in today’s unpredictable geopolitical climate, we recommend DB plans stay alert of any changes that could have a negative impact on their portfolios and be ready to respond accordingly.”
According to the survey, 30% of respondents plan to decrease allocations to U.S. large-cap equities in 2019, perhaps due to ongoing volatility that shows no signs of abetting. In what may be a response to geopolitical tensions, trade wars and tariffs, 17% of respondents said they will decrease allocations to emerging markets, and only 5% expect to increase allocations to international developed markets.
The DB plans surveyed also indicated their intentions to diversify their portfolios by increasing allocations to private equity (29% of respondents) and hedge funds (24%). Similarly, a third (32%) of respondents said they plan to increase allocations to safe-haven investments such as treasuries, perhaps because 85% expect the 10-year Treasury yield to increase from its current level of 3% by the end of 2019. None of the survey respondents anticipate increasing allocations to high-yield investments, a riskier option.
In terms of investment strategies, many of the DB plans surveyed indicated they will take safer, more conservative approaches to managing governance priorities in 2019. Seventy percent of respondents said they’ll stay the course, while 21% will revise plan documents and their investment policy statements. Very few plan to revise glidepath monitoring and implementation (6% of respondents) or consider an outsourced CIO model (3%).
Most respondents are continuing to implement liability deductions as the primary way to reduce PBGC premiums, either by to partially annuitizing their plans (50%) or making lump-sum payouts (33%). A smaller percentage (17%) will continue to make additional contributions. None of the respondents are interested in a plan split.
DB Plans Remain Cautiously Optimistic About Economy Despite Concerns of U.S. and International Political Tensions
The survey also asked respondents about their economic outlook going into 2019. Key findings include:
- When asked about what they consider to be the biggest threat to their portfolios in 2019, nearly three-quarters (73%) of respondents cited politics, whether at home or abroad. Forty-three percent of respondents said they’re most worried about geopolitical tensions, followed by political uncertainty at 30%.
- One in five (21%) of the plan sponsors surveyed consider Federal Reserve action, such as adjusting the balance sheet, to be the top threat.
- The majority (61%) of respondents characterize the odds of the U.S. experiencing a recession in 2019 as “unlikely,” while another third (36%) think it’s “possible.” None of the DB plans surveyed consider a recession “likely to occur,” while just 3% said it has “no chance of occurring.”
- Respondents were divided on how they think the S&P 500 will perform in 2019, with 42% of respondents expecting returns in the 0-5% range and 40% forecasting 6-10% returns. Nine percent of respondents predict S&P 500 returns will exceed 10%, while an additional nine percent expect negative returns next year.
About the Survey
This survey was conducted online by NEPC’s Corporate Practice in October 2018. The survey had 33 respondents from both corporations and healthcare organizations. Copyright is held by NEPC.
About NEPC, LLC
NEPC® is an independent, full-service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with discerning investors on both an advisory and discretionary basis. We service 360 retainer relationships1, representing assets of $1 trillion with approximately $62.2 billion in alternative assets, from our offices in Boston, Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Portland and San Francisco. We encourage your comments and feedback, as well as any inquiries you may have about our firm or our consulting services. Learn more at www.nepc.com/focus-areas/corporate.
1statistics as of 1/1/18