GSAM's Mr. Moran said that in the past few months, clients have been hitting their funding triggers for the first time in a couple of years, and there has been a wide disparity among plans either implementing changes or waiting for still more funding improvement.
“One thing we are telling clients is if a glidepath was put in place two, three or four years ago, there was probably a good reason to do that … and that reason is still applicable today,” Mr. Moran said. “The whole glidepath process is to take a view on rates out of the equation. That way you do not have to make a call on interest rates.”
When making client presentations, Mr. Moran uses a cautionary tale about a pension plan he declined to name that was 108% funded with a 67% allocation to equity in 2007 that found itself 74% funded the next year.
“It's almost like a scare tactic,” Mr. Moran said. “It's amazing how many clients I show that slide to and they say, 'that was us.'”
Mr. Moran said corporate executives can have a risk management view of their plan or an investment returns view, but it is difficult to combine them.
Executives at Russell Investments make it a point to constantly remind clients that the gains in funded status from a rising discount rate outpace the asset losses from a traditional fixed-income portfolio, and plans using a glidepath should not worry about benchmark returns, said Martin Jaugietis, New York-based managing director, LDI solutions. Russell automatically transfers assets along the glidepath for clients that grant full investment discretion.
But not all investment consultants recommend automatic triggers. For example, SEI Investments, Oaks, Pa., supports looking at market outlooks and individual client situations before making reallocation recommendations, said Jon Waite, chief actuary and director, investment advice.
“If markets are not as liquid, maybe it's not a good time to get fixed income,” Mr. Waite said. “It's not just about leaving it up to the computers.”
Executives at SEI client National Grange Mutual Insurance Co., Keene, N.H., believe the long-duration component in the company's $118 million open pension plan has been “extremely successful in helping hedge that liability,” said Thomas Frazier, chief investment officer. However, the plan actually decreased its long-duration allocation to 23% from 28% on June 1 to take advantage of current markets despite the plan being more than 110% funded. At the same time, it is lowering risk in the equity portion by moving 24% of assets into domestic and global managed-volatility strategies.
Money manager sources said each plan has a unique situation, and that frozen and closed plans are more likely to adhere to their glidepaths. The size of the pension liability compared to the overall corporate balance sheet also plays a large part in how comfortable plan executives might be with their growth portfolio, Russell's Mr. Jaugietis said.