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Funded status, costs, and regulations
A pension plan’s funded status represents its ability to pay benefits to participants, so obtaining full funding has been a primary objective for plan sponsors in prior surveys as well. Vanguard believes it’s a worthy goal because funded status reflects the plan’s financial health relative to the sponsor’s financial position.
As pension plan costs have increased, so has plan sponsors’ concern about them. We noted earlier in our series how plan sponsors try to control costs—and a few unintended consequences of those actions that they should be aware of.
Investment policy objectives and LDI
Not surprisingly, when asked about their plan's investment policy objectives, plan sponsors’ responses echoed their top concerns, as shown below.
Most popular primary and secondary investment policy objectives
The most popular primary and secondary investment policy objectives continued to be improving funded status (45% primary, 32% secondary) and minimizing the volatility of funded status (31% primary, 34% secondary), which has steadily decreased as a secondary objective since 2015 (45%).
Jim Gannon, Vanguard senior investment strategist and lead actuary, explains that “historically, investment policy statement objectives have focused on assets: the portfolio’s target rate of return or the risks taken in terms of loss of assets. But a pension plan’s goals should more appropriately focus on the plan’s asset/liability measure. That is, a plan’s goals shouldn’t relate to asset growth or maintenance but to funded status growth or maintenance. Maintaining and improving funded status will allow pension plans to pay benefits now and give them the confidence that they’ll be able to pay them in the future.”
The search for better outcomes, more expertise
Among plans not using OCIO services for asset management, 37% are considering using one, up from 12% in 2018—meaning that 86% of plans are now either using an OCIO or considering it. Consistent with our 2018 survey, the top reasons that pension plan sponsors use or consider using OCIO services are to improve financial outcomes and to offset a lack of pension expertise. In a three-way tie for third are the complexity of pension regulations, lack of time, and competitive cost.
Reasons to use or consider using OCIO services
Outsourced CIO services offer increased governance, greater sophistication in plan management, and both investment and fiduciary risk control. Vanguard provides our OCIO clients with another layer of expertise that many plans find helpful: pension experience. “We’re an investment management firm with a pension strategy team, so our pension clients get a second opinion from the same firm that manages their plan,” Jim says. “They appreciate the additional insight.”
“When we consider a pension plan’s investment strategy and its IPS,” says Vanguard Senior Investment Consultant Valerie Dion, “we focus both on the interactions between the plan’s assets and liabilities and on how the plan’s performance could affect the company’s performance. Our OCIO services combine investment and portfolio construction expertise with deep actuarial expertise, making us uniquely qualified to help pension plan sponsors understand the connections among the plan’s investment approach, plan management, and the company’s financials. Our top-down view can help plan sponsors make better decisions about their plans.”
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.