J.C. Penney Co. Inc. is moving to a liability-driven investing strategy for its $4 billion defined benefit plan, the company revealed today.
We were more equity weighted, said Robert B. Cavanaugh executive vice president and CFO in a webcast announcing the change. Why? Because we were chasing a different character liability. Now we are going to more LDI, liability-driven investing, more fixed-income weighting because it better matches the (pension) promise.
The Plano, Texas-based companys pension liability will be decreasing as a result of a plan closing to new entrants as of Jan. 1, 2007
Our current investment strategy has a heavy weighting toward equity with its higher expected return, said Michael D. Porter, vice president and treasurer.
As we go forward, our liability growth slows and then becomes negative. We can now shift from equities to a more stable bond portfolio. As the economic characteristic (of the pension plan) changes, it becomes more bondlike: higher cash flows and more predictable. This allows us to transition to a fixed-income weighted portfolio with its lower expected return but also with its lower risk and volatility yet still be matched to our liability characteristics going forward.
The fund has a total of 70% in domestic and international equities, he added. The plan is 105% funded, up from 93% as of Jan. 31.
J.C. Penneys use of mark-to-market accounting for its pension plan has been the driving force for its strategy, Mr. Cavanaugh said.
The accounting liability has it all wrong, Mr. Cavanaugh said. The tax liability has it all wrong. Those are not the real liabilities. The economic liability its real simple is the liability we always managed to. From that liability, we then try to match the investment strategy and the contribution strategy.
J.C. Penney had $3.2 billion in 401(k) defined contribution plan assets as of Sept. 30, according to Pensions & Investments profiles of the largest plan sponsors.