The high assumed return rate is needed because UPS' 2012 blended discount rate across all of its pension plans is 4.42%, said Brian H. Pellegrino, chief investment officer of the UPS Group Trust, in an e-mailed response to questions.
UPS' current investment structure provides flexibility to change the plans' asset allocation when their funded status improves or when discount rates rise back to 2010 or 2011 levels, which were 5.98% and 5.64%, respectively, for UPS, Mr. Pellegrino said in the e-mail. “100 basis points is a big deal,” when it comes to discount rate changes, he added.
The UPS defined benefit plans were 78.3% funded as of Dec. 31, according to Pensions & Investments' analysis of the company's most recent annual report.
But as Mr. Pellegrino explained during a presentation at the Milken Institute Global Conference in Beverly Hills, Calif., in April, “the length of time” pension executives have to “meet liabilities makes a huge difference” in the way they can manage the fund.
UPS has a young employee population and with long-term liabilities not due for 20 to 30 years; “it means you can take more risk and tolerate more volatility,” Mr. Pellegrino said during his speech.
The UPS pension staff took that institutional tolerance for risk and began moving to a less-traditional investment approach in 2007, well before taking on the 1907 Fund project. At the end of 2012, the defined benefit plans' asset allocation was 38.8% equities, 32.5% fixed income, 11.1% hedge funds, 5.6% private equity, 4.9% real estate, 0.9% cash, 0.8% structured products and 5.4% other (including global tactical asset allocation).
Beginning this year, UPS eliminated its target asset allocations and moved to investment ranges to “provide increased trading flexibilities in support of plan objectives,” Mr. Pellegrino said in a telephone interview.
The broad asset ranges are 25% to 55% global equity, 15% to 40% fixed income, 8% to 20% liquid alternatives, 3% to 10% real assets, 3% to 10% private equity and 1% to 10% cash.
That flexible approach extends to the 1907 Fund, which is designed to allow the investment team to take advantage of fast-moving market opportunities created by market dislocations globally.
While the investment team possessed the investment skills necessary to make decisions about the opportunistic credit and fixed-income relative value deals coming UPS' way, it became apparent UPS needed to outsource the investment platform and infrastructure, Mr. Scardina said.
Because there wasn't an off-the-shelf operational infrastructure product available, Mr. Scardina said New York-based HedgeMark International was hired to build a customized investment platform that provides separate accounts managed exclusively for UPS.