The panelists did warn, however, that demand for long-duration bonds to defease liabilities could drive bond prices down.
"Could there be a market impact? Possibly," said GSAM's Mr. Winkelmann. "But I guess the way I come into this is, once we start thinking about risk and return in surplus terms, we can much more explicitly identify where we're taking our views (on investment strategy). The discount rate is down 50 basis points and we think it's going to go back up. … So the key thing here is being very explicit about the potential sources of portfolio returns and adjusting the pension policy accordingly."
Mr. Chiappinelli added: "We have had these conversations (with clients), taking it from an LDI perspective … (that) we may need to extend duration. And that's crazy. Clients say, ‘I'm taking on a huge interest rate bet,' and we have to politely say, ‘You already have one; you have had one on for a long, long time'."
Ever since Nobel Laureate William Sharpe and Lawrence Tint wrote their famous paper in 1990, "Liabilities — a New Approach," corporate pension plan executives have been pondering where interest rates have to be in order for a liability-driven investment strategy to make sense. That's because liabilities are discounted based on yields of both high-grade corporate and Treasury bonds.
Morgan Stanley's Mr. Leibowitz, who has written several research papers on liability-driven investing, said the rising popularity of derivatives market strategies such as interest rate swaps will help companies implement LDI strategies.
He agreed that since the current overnight rate is 5.25%, the highest it's been since 2000, an LDI strategy might be appropriate now.
"Researching the right way to take advantage of the opportunities that a long-term liability affords is better now than it's ever been, in terms of the tools that are available and the familiarity and the acceptance of those tools," said Mr. Leibowitz. "I think there still are issues as to whether there are times in the market when one should put these things on and times when one should not, or not put them on fully, and times even when the issue of taking them off may arise."
Mr. Waring also made the point that managing liabilities is a style of active management, because, in essence, a corporate pension plan is taking an interest rate bet in doing so. "Right now, when I show a client what their interest rate exposure is, and I tell them that they have an active view on it, and they look at it, their eyes get … big," he said. "It's because what they're seeing is typically eight, 10, 12 years of percentage points, or your duration, however you want to express it, in a couple of different dimensions of duration.
"And they say, ‘Well, you know I think rates are going to go up so I'm not sure I want to change that.' And I say to them … Why don't you think about putting on a policy, a beta position of being fully hedged (against liabilities) and then tell me how much, based on the strength of your views about interest rates, you would like to stay short as an explicit view that you are willing to stand up and be accounted for.' And I get these very silly smiles from people, because all of a sudden they may be accountable for the views; the implicit bet they are not accountable for."
The roundtable participants also lamented the trend of U.S. corporations freezing their pension plans in favor of defined contribution plans.
"I feel a little bit wistful, you know, when we talk about the death now for DB plans," said CRA RogersCasey's Ms. Steer. "I feel very much that (a DB plan) is an efficient mechanism, and I believe very much in the DB side of the house. I also think we have, as an industry, for the last 15 years not invested enough on the education of the DB side. … We have a lot of catching up to do."
Ms. Guernsey added: "Reason No. 1 (for corporations freezing their DB plans) is, as an employer, it's unclear that it's truly seen as a benefit by employees. Given the turnover rate of the average tenure of employees in most corporations today, waiting around for a defined benefit plan is just no longer in the cards. Second is that — at least as currently managed — defined benefit plans are extremely expensive."