2018 Industry Innovation Awards

Corporate Defined Benefit Pension Plan Below $15 Billion

Eli Lilly

Susan Ridlen, Chief Investment Officer
Susan Ridlen
Art by John Jay Cabuay

In pursuit of ways to aid retirement beneficiaries, Susan Ridlen is not satisfied with cookie-cutter solutions. She strives to bring innovative techniques to the pension arm of pharma firm Eli Lilly, which had a global DB plans valued at $11.8 billion as of yearend 2017.

In all, she is directly responsible for $18.2 billion (US-based DB, DC, and OPEB plans), and provides advice to Lilly’s international plans, which carry another $3.2 billion of DB pension assets.

Under Ridlen, who has been Lilly’s CIO and assistant treasurer for 14 years, the company was the first BlackRock client to customize its own target date fund design and glide path. That happened in 2009, and to this date, the Lilly version is still beating the performance of the shelf product for BlackRock, one of the 401(k) providers for the Lilly benefit plans. Ridlen and her staff completely review the design and composition with BlackRock roughly every two years and update it to keep it best in class.

Ridlen knows Lilly and its needs very well. She has been with the firm since 1991, when she joined after grad school and a few years as a senior auditor at Arthur Andersen. Before ascending to CIO, she worked in various financial capacities for Lilly, including CFO of manufacturing and global treasury director in Belgium. 

As CIO, Ridlen has several core principles, some of them contrarian, which have served her well. She believes in active investing, in a time when passive investing is in vogue. Another is a belief in worldwide investing, not holding a home country bias.  Hedging currency risk is a third must-do for savings plans where participants’ short-term behaviors are a factor. She also insists on offering 401(k) participants at Lilly a set of robust asset classes in the direct line-up and in the target date fund series.

In this regard, consider the reshuffling Lilly did on the Barclays Aggregate, making the company the first BlackRock client to insist on an alternative to the vaunted bond index. After 18 months of co-development with BlackRock, Lilly’s plan seeded their new FIBR (Fixed Income Balanced Risk) Plus product, to moderate the concentration and duration risk coming from the AGG.

This offering has more diversified credit and interest rate exposure than the AGG index.  And it has outperformed the AGG (and outperformed BlackRock’s Core Alpha Bond Portfolio) since inception. Lilly now uses a 50/50 blend of the AGG/FIBR for short/mid-fixed income exposure in its target date funds.

As a large US corporation that still sponsors a defined benefit plan, Lilly has a CIO who is a strong proponent of the traditional pension concept. Since 2007, she says, “I have prepared numerous analyses and made executive and board-level presentations about every other year, demonstrating how a DB plan is more efficient and less costly than a DC plan in delivering a set amount of retirement benefit.” As she puts the matter: “It’s the right thing to do economically, and for the employee.” 

Ridlen argues that DC plans have been less expensive for companies, not because they changed from DB to DC, but because they dramatically lowered the ultimate benefit to the employee at the same time. 

“For a given dollar of benefit in retirement to an employee, a DB plan is a much more cost-effective means of delivering the benefit, and leveraging the pooling of risks,” she says. To do so, she finds, companies have to manage the accounting and cash volatility along the way, to reap the long-term, lower-cash-cost benefits. 

She also has come up with a clever way to tap surplus assets, in this case regarding Lilly’s retiree health trust, and without changing benefit offerings. The retiree health fund’s assets well exceed the its projected liabilities by around $1 billion. These excess assets reside in a tax-efficient VEBA that holds a trust-owned life insurance contract.

This allows the cash value of the policy to grow over time and to disburse benefits without incurring taxes on the earnings inside the policy. “In the future as the policy pays out on death claims,” she says, “those proceeds can be used to pay retiree health claims.” Insurance contracts, however, can be borrowed against, without disrupting the contract structure, so liquidity is accessible.  

At the same time, benefit plans can be reorganized (without changing benefits) so that unfunded benefit plans can gain access to the excess assets, but require IRS approval. Lilly will be filing a private letter ruling with the IRS to allow that to happen.

In addition, she works with three funds of hedge funds, and has struck an agreement with them to use their own due diligence databases to aid Lilly’s in-house efforts. Although she has already reduced FoHFs exposure to 60% of hedge fund investments from its original 85%, she is currently working to push it further down to roughly 40%, by building out a broader direct HF book of core exposures. This will reduce Lily’s fee outlays. “If the FoHFs want us to stay, and keep money with them,” she explains, “they need to make it worth our while and we have to have a partnership where the give and take feels more balanced.” 

Meanwhile, her innovative bent has not been confined to American shores. Ridlen successfully negotiated a parent company guarantee with the trustees of Lilly’s $2 billion UK pension plan. Using assets already on Lilly’s consolidated books, the guarantee did not generate any material economic cost or disclosure, but provided protection of the asset allocation to preserve the DB benefit (and asset earnings) for the company’s UK participants.

Thus, once again, Ridlen proved she could enhance beneficiaries’ lives, while safeguarding Lilly’s financial soundness.

By Larry Light

Corporate Defined Benefit Pension Plan Below $15 Billion Finalists

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  3. Michelin North America
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  4. Air Canada
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  5. Mars
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