Executives at Exelon Corp., Chicago, are powering the utility's $8.65 billion defined benefit plans toward a liability-driven investment strategy.
The move is designed to reduce risk and volatility, and is seen as a way to help make up for a 26.6% investment loss the seven pension funds suffered in 2008, said Douglas J. Brown, chief investment officer. Exelon officials won't say how much money is in LDI.
Mr. Brown's hiring was part of that process. Mr. Brown, who had been CIO of Chrysler Group LLC, Auburn Hills, Mich., joined Exelon in November 2009 as the company's first CIO. His assignment: help develop an investment oversight committee and internal investment team to guide the board in investment decisions and implement an LDI strategy to decrease the volatility, both in plan assets and its funded status.
The change in investment policy “was a clean-sheet-of-paper approach,” he said.
Exelon officials launched the LDI strategy last spring, putting in place a liability hedge portfolio that matches the fixed-income portfolio with the fund's interest-rate liabilities.
As a result of the move into LDI, Exelon's pension executives last year reduced domestic equities to 24% of assets from 32%; doubled alternative investments to about 6% from about 3%; and increased international equities to 23% from 17%, funded by the reduction in domestic equities.
In addition, international fixed income got a first-time allocation of 1% of assets; cash dropped to zero from 2%; and domestic fixed income, private equity and real estate were unchanged, at, respectively 37%, 6% and 3%.
“The volatility in terms of risk in the asset portfolio was quite a bit lower in 2010 than 2009 because we implemented the strategy and took the equity level down; that will go down again in 2011,” Mr. Brown said.
The company ultimately aims to have roughly 50% in fixed income, 30% in equities and 20% in alternatives.
Mr. Brown said the LDI strategy is designed to be flexible so plan officials can react to changes in capital markets. “This is a dynamic process,” he said. “We have the path in place. Ultimately, we hope to become fully funded.”
He said Chrysler took a similar LDI approach with its pension fund in 2007. “We put a fairly large liability hedge portfolio in place,” reducing exposure to long-only equities and increasing alternatives.
“If you look at virtually any large pension fund that is well run, they are now taking an LDI approach,” Mr. Brown said. “The degree of how much they're hedging will differ based on their circumstances.”
The move to LDI had its roots in a decision by the company's board of directors and its investment committee that it was time to change the plans' investment strategy after the plans collectively dropped to $6.66 billion from $9.63 billion in 2008, Mr. Brown said.
He said the board determined that “we, as a company, could not tolerate the level of risk and the level of volatility in the asset portfolio and the funded status, and that was a big driver in the change.”