Perspectives : Asset Management | November 09, 2023

What’s keeping pension plan sponsors up at night?

Updated February 9, 2024

Read time: 7 minutes

In this third and final article highlighting our 2022 survey of corporate pension plan sponsors, we’ll examine their top concerns and investment policy objectives. We’ll finish with a look at why plan sponsors consider using outsourced chief investment officer (OCIO) services.

Funded status, costs, and regulations

As the chart below shows, pension plan sponsors’ top three concerns mirror the results of our 2018 survey.

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.”

77 %
of investment policy statements include a liability-driven investing strategy statement.
More than three quarters of plan sponsors, 77%, said that their investment policy statement (IPS) includes a statement of their liability-driven investing (LDI) strategy. As in prior surveys, the most common form of LDI strategy outlined in those plans’ IPS is a derisking glide path.
“Plan sponsors sometimes wait to adopt a glide path,” Jim says, “because the plan hasn’t reached the maintenance stage yet. The pension committee starts in return-seeking mode, trying to improve the plan’s funded status, then eventually shifts to risk management mode, trying to maintain its funded status. That transition happens gradually and reflects the plan sponsor’s changing financial needs. Plans slowly eliminate their allocation to return-seeking assets in favor of liability-hedging fixed income as the funded status rises. By the maintenance stage, plan sponsors should be more concerned with sustaining funded status than with trying to improve it.”

The search for better outcomes, more expertise

The percentage of respondents who use outsourced chief investment officer (OCIO) services rose from 33% in 2018 to 49% in 2022.

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

Read the survey report

Other articles in our 2022 pension sponsor survey series

Pension funded status risk: Perception versus reality

Pension plan design changes: Plan sponsors controlling costs

Notes: 

  • 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.