It’s time for corporate defined benefit plans to renew their focus on growth, according to a report released this week by Cambridge Associates.
In recent years, the report says, many DB plan sponsors have focused mainly on de-risking their pension plans, taking different steps depending on their plans’ funded status, future accruals and long-term goals.
Instead, it argues, all corporate DB plans should actively turn their attention to growth in the context of their plan’s unique circumstances.
Current market conditions make doing so even more pressing, given increased volatility in global equity markets, relatively high valuations in various market segments and the late stages of the economic and credit cycles.
“Plans of all stripes need to focus on their growth portfolio,” the report’s co-author Alex Pekker, senior investment director in Cambridge Associates’ pension practice, said in a statement. “It is essential to maximize return potential, while still controlling risk, across both growth and liability portfolios.
“Even well-funded plans should not neglect this exercise because returns play a large role in offsetting administrative expenses and funding liability gaps, both of which are critical to plan health over time.”
According to the report, pension growth involves a variety of investment strategies, including global equities, private investments and hedge funds. It also includes fixed income, both as a liability hedge and as an asset class that can drive excess returns through allocations to actively managed credit, including alternative credit.
The report underlines the potentially significant return potential available through an allocation to private investments — if the program is designed effectively.
Private investments can potentially increase portfolio returns significantly and offer other attractive attributes for plan sponsors that are willing to lock up some portion of their assets and assume the complexity of the asset class.
The report notes that private investments have demonstrated outperformance versus public markets over appropriately long periods of time. For example, it calculates that private equity has outperformed its public market equivalent by 2.4% and 5.3% over 10 and 20 years.
“The number of opportunities for private investing has grown tremendously over the last few years, providing an excellent way for plan sponsors to secure portfolio growth despite market headwinds,” Barjdeep Kaur, Investment Director at Cambridge Associates, said in the statement.
“That said, when there are thousands of managers to select from, having a solid understanding of how to construct a program is critical to long-term success.”
The report stresses the importance of regular comprehensive reviews of growth engines should in order to maintain a long-term view and actively manage the plan against ever-changing market conditions, plan circumstances and sponsor-specific dynamics.