KNOWLEDGE CENTER

The Pension Management Research Panel conducted a Quick Poll asking executives to identify the most pressing issues they are currently facing regarding their organization’s pension plan. The poll was completed by 85 executives overseeing pensions ranging from US $25 million to US $10 billion in assets. None of the poll respondents were institutional clients of SEI.

SECTION I – DEMOGRAPHICS

SECTION II – ARE MORE PLANS CLOSING?

Poll participants were asked to identify the current state of their organization’s pension and they were provided the following definitions as options:

• ACTIVE - The pension is active and open to new hires.
• CLOSED - The pension is closed to new hires, however existing participants are still accruing benefits.
• FROZEN - The pension is closed to new hires AND existing participants are no longer accruing benefits.

FAST FACT:
When asked whether or not the termination process is underway,
NONE of the poll participants said that was currently the case.

More than half (53 percent) of the poll participants said their organization’s pension plan is closed to new participants and/or accruals have been frozen. This appears to be trending upward when compared to a similar poll released in August 2009, in which 48 percent said the plan was closed or frozen(1).

(1)“Taking Back Control of Pensions: The Global Turnaround Has Started” Pension Management Research Panel (August 2009)

There appears to be differing views when it comes to the future of the pension between that group and the 47 percent of poll participants overseeing active plans. 

To determine whether or not a funding deficiency was the only factor preventing plans from terminating, poll participants were asked to assume their plan was fully funded. If that were the case, would they look to terminate the plan as soon as possible?  

• ACTIVE - Three quarters (75 percent) of the plans currently active said they would not look to terminate because the pension is a critical part of their employee benefit structure.
• CLOSED – More than half (57 percent) said they would not look to terminate, while the remaining 43 percent said they would while continuing to offer or enhance other retirement benefits.
• FROZEN – This group appears to have already made the decision to move towards termination. If the plans were fully funded, 73 percent said they would look to terminate the plan as soon as possible.

SECTION III – USE OF ALTERNATIVES IN PENSIONS

Historically, alternative investments were not commonly used in pension portfolios and only recently have those asset classes started to become popular among pension plans.

How much of the portfolio is being invested in alternatives?

Use of alternatives in pension portfolios is on the rise

The portion of respondents with alternatives in their portfolio was compared to results from similar polls from the last two years(2). The chart below illustrates an upward trend of the use of alternatives in pension portfolios:

• Use of alternatives differs based on size of portfolio – More than one-half (53 percent) of the plans with less than $300 million in assets are currently invested in alternatives. By comparison, 84 percent of the plans with more than $300 million in assets are invested in alternatives.
• Allocations based on size – Larger plans appear to be investing a greater portion of the portfolio in alternatives.

Alternative allocations based on size of the organization’s pension portfolio.

FAST FACT:
Three-quarters (75 percent) of respondents with active pensions currently use alternative investments in the pension portfolio, while less than one-half (44 percent) of those with closed or frozen plans said that was the case.

(2)The 2009 results were from“Taking Back Control of Pensions: The Global Turnaround Has Started” Pension Management Research Panel (August 2009). The 2008 results were from "Globally, Financial Executives Searching for a Respsonse to Volatility of Pension Investments" Pension Management Research Panel (June 2008).

As noted above, nearly two-thirds (65 percent) of the poll participants said their organization currently has pension assets allocated to alternative investments. That group was asked to identify in which alternatives their organization currently invests or is considering investing.

A breakdown of the responses of that group based on whether they are currently using or considering the following asset classes:

SECTION IV – LIABILITY FOCUSED STRATEGIES

Historically, some of the more popular tools used in LDI portfolios have been increased allocation of fixed income, use of long-duration bonds, and use of interest-rate swaps. Long-duration bond strategies continue to be viable options in the current market environment because bond and liability values are similarly sensitive to interest rates and move in tandem. This was also supported by the fact that nearly one-third of poll participants said the organization is considering implementing an LDI strategy using long-duration bonds.

However, given the current market environment, the implementation of these strategies including the use of interest rate swaps, may not be as effective as in the past. Poll participants were asked if their organizations were currently implementing an LDI strategy:

While more than two-thirds of the participants said that LDI strategies aren’t currently being implemented, the poll results suggest that this could just be a result of current market conditions. The poll results did show an increased sensitivity to the liabilities in the pension plan:

• Nearly one-third (30 percent) of poll participants said effectively managing duration moving forward is a concern.
• Nearly all (91 percent) of the poll participants said that “improving or protecting the plan’s funded status” was a more important benchmark of pension success than “increasing absolute returns.”

SECTION V – CONCERNS MOVING FORWARD

• Funded status volatility continues to be a major concern – The ongoing volatility of the capital markets and of interest rates continues to result in funded status volatility, and plan sponsors continue to be challenged in controlling this critical component of pension financial management. The highest percentage (88 percent) of poll respondents cited this as a concern in managing the pension. 
• Underfunded plans – Recent industry reports suggest that a significant gain in assets during 2009 helped pension funding levels improve by 8 to 10 percent, finishing the year on average at roughly 78 percent funded . While there was improvement, many plans are still under-funded. Most poll respondents (85 percent) said that improving the plan’s funded status continued to be a focus.
• Senior management involvement – As pension finances have become more transparent to analysts and shareholders, questions to Boards and senior management have increased. Nearly half (45 percent) of the poll participants said that providing senior management or their Board with a long-term pension strategy has become a priority.
• What if the events of the past two years happen again? – Just as the funding requirements of the Pension Protection Act (PPA) were being implemented over the past two years, the capital markets have experienced an unprecedented level of volatility. That volatility coupled with an interest rate environment that is also highly variable has made portfolio design with the goal of improving or protecting the pension’s funded status extremely difficult. Stress-testing the portfolio to gauge its ability to withstand extreme macroeconomic environments was listed as a challenge by one-third (33 percent) of the poll participants.
• Fiduciary roles for consultants – The events of the past two years have brought into question the fiduciary roles of the investment consultants as some pensions experienced investment fraud and unreasonably poor performance from some managers. Pensions have increased their due diligence process and nearly one-third (32 percent) of the poll participants said that examining and defining the fiduciary responsibilities of the trustees versus the investment consultant is part of that.

If you have any questions or comments about the results of this poll, please feel free to contact us via email at SEIRESEARCH@SEIC.COM or by phone at 1-866-680-8027.

This information is for educational purposes only. Not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information. Information provided by SEI Investments Management Corp., a wholly owned subsidiary of SEI Investments Company. ©SEI 2010 

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