hero-image-1.jpg

Pensions & Investments: LDI is Behind Improved Funding of Corporate DB Plans, NEPC Says

November 14, 2019

Pensions & Investments wrote an article featuring the recent Corporate Defined Benefit Plan Trends Survey. View the article on their site here. 

The funded status of corporate defined benefit plans has improved since 2017 despite increased costs and declining discount rates, results of a survey by investment consultant NEPC said.

NEPC's survey of 121 pension plans conducted in September revealed that about 60% of plans have a funded status greater than 90% in 2019, compared with 46% two years ago. These better-funded plans have embraced liability-driven investing, glidepaths and liability reduction strategies.

About three-quarters of plans with a funded status above 90% have used LDI ,and two-thirds have 40% or less of their assets allocated to equity. Among plans that use LDI, 44% have an allocation of 51% or higher, compared with 37% and 9% 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," Brad Smith, a partner in NEPC's corporate defined benefit group, said in a news release. "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."

The survey also showed that 84% of plan sponsors believe a recession is likely to occur in the next three years, with half of those respondents expecting it within 12 to 18 months.
More than half of corporate plan sponsors (58%) are bearish on the stock market and believe discount rates may be the same or lower over the next 12 months (63%). When asked what they believe the biggest threat to their portfolios is, respondents are split among geopolitical tensions (30%), political uncertainty (29%), and Federal Reserve action (28%).

One-third of respondents stated that they have a return assumption of 6% or less compared with 20% in 2017.
The survey revealed that 62% of plans, including both open and closed plans, are still accruing future benefits. Respondents indicated 38% of plans are frozen, 34% are closed, and 28% are open.

Due to growing costs and interest rate volatility, 23% of plans are unsure if they will stay open, vs. 12% from two years ago.

Topics: Press, Press Coverage

Read our disclaimers.