The environment for pensions has been a challenging one.
Bond yields remain at or near historic lows around the world, leading to a substantial increase in the value of plan liabilities. Expected asset returns have also been falling, affecting both corporate earnings and the value of public pension liabilities. Even as plans seek to de-risk over time, new mortality tables—taking into account people’s longer life spans—are also boosting the value of liabilities. Together, these trends have resulted in a deterioration in funded status experienced by many defined benefit (DB) pensions globally.
In this PDF, What if we live in a low-return world? Implications for pension funds, we discuss the long-term trend for growth across asset classes and the implications, as well as potential solutions, for pension funds. In the first section, Michael Cembalest, Chairman of Market and Investment Strategy, looks forward at global growth, productivity and demographic trends and examines the consequences for long-term interest rates. In the second section, we explore the pension landscape in more detail, looking at the portfolio implications of a low-return world and outlining potential investment considerations and solutions.
One such approach for pensions is a liability-driven investment (LDI)1 solution. Due to the continued focus on de-risking their portfolios, pensions are increasingly implementing LDI strategies. According to a recent Cogent study, four in 10 pensions already employ LDI, up from 22% in 2012, and another 16% are likely to do so in the next 12 months.2 Nevertheless, many plans continue to wait for a return to an elusive "normal level" for bond yields before reducing the liability duration mismatch further. Open pension plans and plan sponsors looking for asset returns to make up some of their funding shortfalls will continue to look for investment strategies that generate return in a "liability aware" framework.
With more than 60 years of experience in DB plan management, we believe we are well positioned to help our clients meet their unique objectives. Our focus is on providing product-agnostic investment advice and solutions for the challenges that investors face throughout their plans' life cycle.
We hope that you will find this PDF useful and insightful.