Corporate plan sponsors on both sides of the Atlantic are pushing back against the ramifications of lower interest rates, tipping a balance to re-risking from a derisking glidepath, say money managers, consultants and strategists.
Continued low — and in some cases negative — interest rates across the globe are battering pension funding levels. Add to that changes to mortality tables and increasing Pension Benefit Guaranty Corp. premiums in the U.S., and the result is corporations are considering a number of strategies:
- hitting pause on their derisking strategy;
- re-risking their asset allocation;
- selling debt to finance pension contributions; and
- continuing to transfer retiree pension liabilities to insurance companies.
“One of the impacts that we have seen over the last few months of quantitative easing in the U.S. has been to lead some pension funds to consider re-risking, rather than derisking,” said Tony Gould, New York-based managing director and head of the pensions solutions group at J.P. Morgan Asset Management. “We have been having a number of conversations with plans thinking that. (They are considering) reducing liability hedges, and increasing allocations to return-seeking assets. That is starting to filter through on (the other) side of the pond,” especially, he said, as Europe's economy continues to struggle.
Some pension executives are thinking beyond the pure derisk/re-risk conundrum. The Santander (U.K.) Group Pension Scheme, Buckinghamshire, England, has just under £10 billion (US$15.4 billion) in assets and £26 billion worth of pension promises. Despite the fact that the plan sponsor has agreed to contribute £1.5 billion over the next 10 years, “we need to find £15 billion of investment gains somewhere,” said Antony Barker, Manchester, England-based director of pensions for Santander U.K. PLC. “A lot of hedging and generating a "gilts-plus-a-little' return isn't going to fill that gap.”
The fund is about 60% hedged on interest rates and inflation, on a derivatives and physical basis. That allows the return-seeking assets “to chase down that true funding gap. Ultimately we will do more hedging over the next 10 years ... but the question is do we do it now?”
Mr. Barker is targeting a surplus position and 90% hedging on interest rates, inflation and longevity by 2025.
“It is true to say that we have stopped doing derivative- and gilt-based hedging, but we are finding our matching plus-type assets elsewhere.”
He is doing that by building on the real estate portfolio, targeting inflation-linked returns. “We are looking for real assets to hedge our longer-term inflation risk — there aren't enough long-dated gilts to cover our cash flows and (over-the-counter) derivatives engender other risks,” Mr. Barker said.