Corporate pension executives who called interest rates right in adjusting their liability-driven investing portfolios to protect their plan's funded status now are tweaking their growth portfolios.
Pension plan chief investment officers are adding more risk assets, particularly private credit, for diversification and to increase overall fund returns.
Corporate defined benefit plans that two to three years ago prepared for an eventual decline in interest rates by increasing the proportion of assets managed in their LDI portfolios to hedge interest rate risk and decreasing riskier assets in their growth portfolios weathered recent interest rate declines well, said industry sources.
Among the funds that were prepared was the $30.4 billion defined benefit plan of United Technologies Corp., Farmington, Conn.
"This is how LDI is designed to work, to protect the funded status of the pension fund from interest rate risk," said Joseph M. Fazzino, senior director, pension investments.
About 54% of total plan assets were managed in UTC's LDI portfolio primarily in long-duration bonds, with a small allocation to private credit as of July 31. UTC's LDI portfolio hedged 66% of the entire fund, Mr. Fazzino said.
Among plan sponsors that employ an LDI strategy, the degree of protection against interest rate declines was critical this year.
"In this environment of falling interest rates, it really mattered whether you hedged enough of the risk and limited your exposure," said Jay Love, an Atlanta-based partner and investment consulting leader for Mercer Investments' U.S. wealth management unit.
He said some defined benefit plan staff hedged interest rate risk for 80% of their portfolios while most plans hedged the risk for 60% of total plan assets and others covered 40% or less.
Mr. Love said the problem for plan sponsors now is that if they didn't hedge enough of their portfolios against interest rate moves, it's probably too late given where rates are now.
"The horse is out of the barn for interest rate hedging and you really can't go back and fix it now," Mr. Love said.