Big Picture View of DB Plan Investments Needed in 2017


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Examining the adequacy of the governance structure, including critical resources and fiduciary risk, should be the first order of business for defined benefit plans entering 2017, Willis Towers Watson said in a recent report.

In an increasingly complex investment world, “complacency is not an option,” according to the report issued by the consulting firm on Nov. 22.

“Governance is about assessing the approach to the oversight of the plan, including the dedication of resources, the frequency of meetings, and the definition of roles and responsibilities; both internally and externally,” Jim Neill, Pennsylvania investment leader for Willis Towers Watson, told Bloomberg BNA on Nov. 30.

Investments typically are overseen by an investment committee, he said. A number of questions should be asked in evaluating whether the committee as currently comprised and operated is consistent with the goals for the plan.

He said these questions include: 

  • whether the committee members have the right skills sets internally to make fully informed investment decisions,

  • whether they understand the complexities of pension plan management,

  • how often the committee meets and how much decision-making authority it has, and

  • where the committee should seek outside assistance to bridge gaps.

Risk/Return and Costs

Smart portfolio management includes finding ways to improve the plan’s risk and return profile, the report said.

A diversified portfolio may hedge interest rate risk, while seeking to generate a balanced return profile, Neill said.

As interest rates increase, they reduce plan liabilities, potentially causing plan funding ratios to improve, while a decrease in interest rates has the opposite impact, he said. “Interest rates are a key risk driver that the plan must manage and investors should be very thoughtful in managing this risk, even if they believe that rates are going up,” he said.

Defined benefit plans should also look for ways to keep their costs low through improved implementation, the report said.

“Fees can potentially be saved via renegotiation with managers, by using smart beta approaches in areas where active management has become more limited and expensive, and by streamlining the investment program’s operational and administrative aspects,” it said. “Every dollar saved through improved efficiency is one less required from contributions or portfolio returns.”

Ways to keep costs low include through economies of scale that the plan sponsor may be able to achieve or access because of its size and partnerships to get preferential fee arrangements from investment managers, Neill said.

Defined benefit plans should consider all these changes in the context of what is likely to continue to be a low-return environment, he said.

“We continue to believe that the market will offer low returns over the intermediate to long term, as we are concerned that valuations in U.S. and foreign stock markets are above average and higher than warranted based on global growth expectations and amount of central bank debt,” he said.

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