Defined benefit pension plans
Defined benefit pension plans and asset-liability management
Defined benefit pension plans exist to pay benefits to the participants that earned them. Our team has decades of experience helping Municipal and Corporate plan sponsors meet their investment objectives. Our process has several steps:
- We review the plan investment policy statement and offer suggestions.
- We go through the actuarial report and work with the plan actuary to understand the future plan cash flow requirements.
- We develop a model for the plan liability that includes interactions with other asset classes such as bonds, stocks, real estate, etc.
- We invest the plan assets based on to the plan funding ratio, target return, and investment policy statement.
Plan surplus and partial plan immunization
The plan surplus is a difference between the plan assets and liabilities. For a defined benefit plan, managing the surplus is perhaps the main plan investment objective. Our team builds an investment strategy based on the plan liability model to select assets that balance lowering the plan surplus risk with the potential for greater surplus growth. To help offset a portion of the plan liabilities, we may partially immunize the plan liability by matching the plan cash flows with a series of fixed income “buckets” that hold bonds with maturities in specific ranges.
Adaptive asset allocation
Different factors contribute to determining an appropriate asset allocation: committee risk tolerance, target return, and funding ratio (ratio of the plan assets divided by the plan liabilities). Our team has a process for adjusting the asset allocation based on the macro-economic environment as well as realized plan asset and liability performance.
Our team has successfully guided closed defined benefit plans from significantly underfunded, to fully funded, to terminated. Our team continues to help our ongoing plan clients to estimate their future costs and plan to meet them. If you have any questions, please reach out to us by phone, email, or through the contact form on this page.
