A multi-billion dollar pension plan of a large manufacturing corporation expects the return-seeking portion of its portfolio to earn 9.5% at 13% volatility, annually. While this is sufficient to pay Pension Benefit Obligation cash flows, it is insufficient to pay future service costs without additional contributions. Our pension specialists partnered with the client to:
We assessed the overall health and structure of the plan asset allocation using our factor analysis model. The team, diagnosed concerns with the plan's existing asset allocation; specifically around return shortfall and risk exposures. Using J.P. Morgan's Long Term Capital Market Return Assumptions, we modeled a new asset allocation to achieve target return objectives.
Liquidity needs: We defined better liquidity risk exposure allowing for larger alpha capture through Alternatives.
Current allocation does not achieve return targets
Portfolio is heavily allocated to public equities, which contributes to over half of the growth portfolio's risk
Stress scenario analysis showed that the current portfolio has elevated exposure to equity risk resulting in high funded status volatility
Based on our analytics and a de-risking objective we provided a solution design to provide:
Return enhancement: Proposed various portfolio options (A, B & C) including an increase in hedge fund, private equity and real estate allocations which would potentially deliver a 9.5+% return with below-threshold volatility.
Liquidity: Developed constraint optimized portfolio options which ensured limited liquidity risk
Our optimization tools, along with J.P. Morgan's Long Term Capital Market Return Assumptions, helped determine a number of efficient portfolios
Allocations were stress tested for range of assumptions including non-normality, auto-correlation and correlation convergence of asset returns
Constraints were added to reflect institutional goals and requirements, making optimization results implementable
A more efficient, liquidity-aware and diversified portfolio
Three implementable alternative portfolios were presented (Portfolios A, B & C). Suggested allocations improved Sharpe ratio while maintaining liquidity risk within desired boundaries
Client elected to implement a private credit portfolio for its balance of return and liquidity risk. The Solution is generating a higher return than a hedge fund portfolio, and is less volatile and more liquid than a typical private equity investment of similar size
The revised asset allocation has been on-track, delivering expected returns within the stated liquidity constraints. The client has maintained asset values while generating enough income to pay benefits over the short-medium term