As Covid-19, or the coronavirus, spreads across the world, we are reminded that preparedness is key when faced with uncertainty. While first and foremost a health crisis, the spread of the virus has had far-reaching implications including an adverse impact on the stock market -threatening the funding status of many pension plans.
At MassMutual, we help pension plan sponsors strategically manage the risks inherent in sponsoring a DB plan in concert with their advisors. Experience tells us that a liability driven investment (LDI) approach is an effective immunization strategy, aiming to insulate funding levels against the impacts of such unexpected periods of extreme market volatility. In an effort to shield against funded status risk, the strategy aligns the duration of a plan’s assets to its liabilities.
As a best practice, the use of LDI strategies are encouraged to abate risk. In fact, a review of the funded statuses of our clients who employ our recommended LDI strategies –each customized for their plan’s needs, shows that they are faring well in the wake of the recent market turmoil.
Our recent experience with a newer defined benefit (DB) client is an excellent illustration of the value of an LDI approach. Here’s more:
After on-boarding the client, it was clear there was ample opportunity to reduce the client’s costs and risks associated with administering their DB plan. With an integrated approach including periodic asset liability modeling exercises, we helped the sponsor understand the state of their plan’s financials, and we helped them establish clear goals.
Three key goals were identified: attain a fully funded status, implement a disciplined approach to manage risks and cost, and align the plan’s assets to liabilities with an LDI strategy.
After acting on our recommendations, our client was able to achieve its objectives and realize some hard and soft dollar savings in the process. Specifically, the client achieved a 100% funded status position, reduced PBGC premiums (with achievement of fully funded status), and implemented an LDI approach.
What’s more, today, in the wake of market disruption caused by the coronavirus, the plan’s funded state remains steady with the LDI strategy in place.
If you would like to learn more about how we can help strategically manage pension risks and costs, please contact us today.
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