Plan sponsors looking to improve their funded status need to coordinate across four possible approaches, according to a new report by the pension practice at Cambridge Associates.
"Plan sponsors are frustrated," said Jeff Blazek, a managing director and a chief investment officer in Cambridge Associates' pension practice and co-author of the report, in a phone interview. "Over the last 10 years they've seen their funding levels barely budge, and that's despite incredible gains in the market."
Many plan sponsors are pursuing singular responses to the funding gap problem, he said. Some, for example, solely focus on raising company contributions to the pension fund. Others, meanwhile, wait for higher interest rates to lower the value of the plan's liabilities.
The report, "A Balancing Act: Strategies for Financial Executives in Managing Pension Risk," argues that this approach is a huge risk, since no one angle alone can close the pension funding gap. Rather than focus on one angle, plan sponsors need to take a step back and assess four angles, or "levers," and find the right balance, Mr. Blazek said.
These levers are:
- asset returns — maximizing investment returns from growth assets such as public equities and alternative investments;
- liability hedges — optimizing investments in liability-hedging assets, such as bonds, to hedge key liability risks, including interest rate risk;
- contribution policy — having an established plan and set of guidelines around when and how to make incremental corporate contributions to the plan; and
- benefit management — altering future benefit structures, policies or strategies.
- The report outlines considerations that chief financial officers and financial executives should consider for each of the four levers, all of which provide specific risks and advantages.
"It's very important to have a plan," explained Mr. Blazek. "We're not saying there are easy solutions. But you need to step back and look at these four levers and come up with a balanced approach."
He added that it's important that the plan sponsors "make these decisions for themselves."
