Frozen and closed defined benefit plans lead the trend
“Such monitoring didn't exist five years ago,” said Jonathan Barry, partner in Mercer LLC's retirement risk and finance group, Boston. As more DB plans move to reduce risk — in ways such as establishing liability-based glidepaths for investment changes or using outsourced CIO programs — daily funded status monitoring “has become more and more prevalent, more and more the norm.”More corporate defined benefit plan executives are keeping their fingers on the pulse of their plans' funding on a daily basis as they move to more risk-based investment strategies.
According to an Aon Hewitt report last month, “2014 Hot Topics in Retirement: Building a Strategic Focus,” 12% of the 220 U.S. employers surveyed said they monitored funded status daily in 2013, and of those that don't, 25% said they were somewhat or very likely to do so this year.
Most of the plans that perform daily monitoring are frozen or closed, and those plans' executives are aware of their long-term liabilities, said Rob Austin, Charlotte, N.C.-based director of retirement research at Aon Hewitt. About half of Aon Hewitt's clients monitor their funding daily.
“Pension funds are taking advantage of market changes that don't coincide with the end of a month or the end of a quarter,” said Mr. Austin. “We're in an age when funded status will change wildly as the market changes wildly.”
Added Mr. Barry: “It's a way of managing an LDI program.”
Daily monitoring “is symptomatic of a trend,” said Thomas Meyers, Chicago-based senior client portfolio manager and head of distribution at Legal & General Investment Management America, a predominately LDI money manager with total assets of U.S. assets under management of $35.2 billion as of Nov. 30. “Clients are engaging consultants and money managers in an accelerated fashion, because they want to get better precision toward bringing their assets and their liabilities closer together.”
The trend toward more daily monitoring has dovetailed with an increase in funded status among corporate DB plans, Mr. Meyers said. According to separate reports earlier this month from Milliman Inc., Aon Hewitt and Mercer, the funded status of U.S. corporate plans ranged from 88% to 92%, increasing from 16 to 22 percentage points in the past 12 months.
Another reason for the higher frequency in monitoring is that “some companies have been burned several times on their funded status,” Mr. Barry said. “Their (pension) funding swings up, then down, then up, then down. It's a question of volatility.”
Along with custodians, investment consultants are providing this information to pension funds, either by giving clients the tools to do the monitoring themselves, or through outsourced chief investment officer programs that provide both the information and the ability to act on the changes. Mr. Barry said information software usually provides index returns to clients, while the outsourced CIO uses actual performance numbers of a client's holdings, calculates the liabilities daily and executes changes based on predetermined glidepath triggers.
Both Aon Hewitt and Mercer offer software for internal management as well as broad third-party monitoring services like outsourced CIO services.
“We know liabilities will move a certain way based on duration,” Aon Hewitt's Mr. Austin said. “It's not hard to determine this.”
Often, the information provided by the investment consultant is combined with data provided by custodians to pension fund clients, Mr. Austin said. “Custodians may not have the underlying data to provide the liabilities, while the consultant may know the liabilities but not the plan's assets,” he said. “Sometimes the pension fund (executive) uses data from both and makes the call. They want to know all this and take action on it.”
At Dow Chemical Co., Midland, Mich., global custodian Northern Trust Corp. provides data that's combined with liability data from the pension fund's staff to monitor funded status daily, said Gary McGuire, CIO. “We have some liability duration guidelines that require daily monitoring,” he said. “We also trade derivatives that have convexity, like swaptions, which makes the measurement somewhat complex.” Dow has $13.5 billion in U.S. pension assets.
Mr. McGuire said the pension staff monitors funded status daily “as best practice. We have the ability to do it … It works very well for us.”
Dow's global pension funds are 75.2% funded, Mr. McGuire said, adding the company does not disclose its U.S. plan's funded status.
While pension funds that use an outsourced CIO service have that third-party firm monitor the funding, resulting changes in allocations aren't done without consulting the client.
Those decisions are based on predetermined triggers in glidepaths established by the pension fund in advance — usually in concert with the third-party provider like a consultant. “They delegate responsibility within constraints that the pension fund has put in place,” Mercer's Mr. Barry said.
“The trigger is generally hard and fast — let's say, changes are made when a plan is 80% funded. There will be a little bit of discretion given to the third party as to where the investment change will land, but they don't just change the asset allocation overall. Generally speaking, the third party doing the monitoring is the same party that helped the pension fund establish the asset allocation in the first place.”
The Dow pension fund does not use daily monitoring to trigger any investment glidepaths, Mr. McGuire said, but could in the future.
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