Focus on the outcome
He added that understanding the difference between the outcomes one wants and the strategies one needs is key to taking the pension, and its liability issues, along the right path. Focusing on the outcome, which is linked to the plan’s persona, can lead to easier decision-making and improved management.
Consider a frozen plan, for example.
“If it’s frozen, which usually means the end is in sight in terms of termination, everything you do today must be accretive to arriving at a termination point,” O’Connor explained. “You should be getting your arms around the overall expenses associated with the plan. Plans that are nonintegrated have expenses coming from investment advisers, actuaries and record keepers, and it gets very unwieldy.”
Complexity can emerge in an active plan just as easily.
“If it’s an active plan, then the persona and reason for funding is often more altruistic in nature, with a purpose of helping employees and retirees secure their futures,” O’Connor said. “This persona may have you on a separate strategic path, where it’s all around the participant experience, all around a record keeper that can provide the right level of digital capabilities and an actuary that’s going to help keep you on the right path. Where it becomes unnecessarily complex is when you bring multiple parties into the equation and you’re trying to, in essence, manage three different sets of priorities as opposed to one plan strategy.”
Once CFOs have set their strategy and simplified their service model by aligning it to a persona for their plans, the challenge becomes what’s next in terms of execution, or what O’Connor called “working” the strategy.
“It’s risk management at the core,” he explained. “For established insurance companies like MassMutual, it’s the same asset-liability modeling they have been doing for the past 150 years…. But strategies like liability-driven investing require active management; and so once you set your strategy, you have to work it. You can say you’re doing LDI, but you’re really not doing it unless you’re actively doing it. For some plans, that’s weekly portfolio rebalancing, it could be monthly, and the minimum is quarterly.”
It also means regular meetings with plan vendors and rebalancing from equity to fixed income, depending on the persona of the plan. “Because what in essence you’re doing is continually derisking,” he added.
Last year’s market fluctuations provided a good example of what plan sponsors needed to monitor and react to when rebalancing portfolios.
“If you were looking at your pension plan and following it on a quarterly basis, which you should be, you would have seen incredible run-up through the third quarter in terms of an equity market’s performance. And then, for most plans, certainly those that are closed and frozen, which is almost two-thirds of the plans, you should have seen a shift in the fourth quarter toward more of a fixed-income approach.... You’re taking some of that equity risk out of the plan, you’re locking in those earnings, and now you’re going to move more toward derisking.”
‘Value of Stability’
Regardless of the persona of a particular pension plan, CFOs and pension plan sponsors have to take the first steps to simplify their plan through an integrated service model, and that will set the stage for more effective funding decisions, something O’Connor recognized is not easy.
“It takes a lot of courage to make a pension funding decision,” he said. “There are lot of other capital projects that that money could be put toward. But I think a CFO understands the value of stability on the balance sheet and income statement. The board of directors understands the value of stability on the balance sheet. And companies are now looking at making investments in those plans to get them into a better spot.” •