2018 Industry Innovation Awards

Corporate Defined Benefit Pension Plan Above $15 Billion

IBM

Harshal Chaudhari, Chief Investment Officer
Art by John Jay Cabuay

His first financial markets job was as a derivatives trader during the throes of financial crisis of 2008. So IBM CIO Harshal Chaudhari knows the importance of downside protection. Especially for a mature plan like IBM’s, where he has focused on de-risking the company’s pension portfolio as funding levels have continued to improve.

Chaudhari is an engineer by training, and that analytical mindset dovetails nicely with the demands of a financial professional. He joined IBM as part of the acquisition of PwC Management Consulting Services. He then served as the company’s head of treasury capital markets and as a CFO for the analytics solutions division before he became IBM’s CIO in 2016.

In his first year, he spent months meeting with IBM’s investment managers, and getting to know the investment philosophy, processes, and the people behind them. “I am fortunate to have a great team, and there is a lot of historical data and documentation, which made it easy to get up to speed quickly,” he told CIO last year.

Understanding the plan designs and liability characteristics was vital for carrying out his de-risking program. He undertook a worldwide portfolio review that led to extensive asset re-allocations for several international pension plans.

At any time, overseeing IBM’s DB and DC funds—the company’s global retirement plan assets total $150 billion—is a daunting task. When the plan was underfunded, the main job was to close the funding gap, he says. Now that it is fully funded, however, the focal point moves to preserving that hard-won status, and improving it.

Hence the focus on LDI to hedge liability risks along with prudent risk taking in the return-seeking portfolio to continue to build the surplus at a measured pace. And he is glad that the IBM team has the operational chops to switch up asset allocation when opportunities arrive.

Significant portfolio actions have been taken in the DB portfolio (a closed and frozen plan), as its funded status improved. This has involved cutting surplus volatility in half over the last couple of years. IBM did this by reducing equities in the portfolio and implementing a well-designed hedging/matching portfolio of fixed-income assets. “As you increase the duration hedge,” he explains, “interest rate moves are pretty much offset to a large degree.”

At the same time, he has striven to deliver what he calls “a high-quality alpha stream.” He views fixed income, while primarily a hedging tool, as a strong source of alpha. “Even if these assets are part of the liability hedging part of the portfolio,” he says, “we utilize active management where the managers are expected to generate a return above a transparent public market benchmark.”

With the large de-risking actions mostly completed, the focus has now shifted to fine-tuning the underlying risk factors. One initiative has been to diversify the spread income in the fixed-income portfolio, reducing the reliance on traditional corporate credit.

Another move has been to improve diversification and draw down control in the growth portfolio. This has led to reduction in high beta asset classes such as REITs and high-yield bonds, as well as a revamp of the hedge fund portfolio, with an eye toward reducing correlation to equities.

That meant replacing high beta event-driven and multi-strategy managers with more market-neutral, low-correlation and long-volatility tail-hedging strategies. “We have taken several steps already in this direction,”  he says, “but it is an ongoing project.”

Since people are the core of any investment team, Chaudhari made a point of restructuring the group with a broad worldwide focus, and the objective was to break down silos, with a goal of enhancing cooperation.

He puts an emphasis on consolidating plan operations where possible, leveraging manager relationships, setting global fee agreements, and boosting knowledge sharing, among other things.

And this is truly a global effort, as IBM has extensive operations outside the US. “We used to have separate asset class leads for US and outside of the US,” Chaudhari says. “It is now a single manager research team.”

In addition, IBM has consolidated operations in smaller countries to be run from central locations. For instance, Chaudhari established a new center in Dublin, which is now an internal OCIO platform running day-to-day investment operations for several smaller European countries on behalf of the local trustees.

His next endeavor is to launch a multi-asset diversified growth fund for internal consumption. It is efficient for IBM’s international plans, with modest sizes, to outsource management of the growth sleeve to an internally managed pooled fund and get an institutional quality, diversified portfolio, including alternatives that they may not be able to access directly.

Amid all this, Chaudhari can take pride that the risk monster is in the box.

By Larry Light

Corporate Defined Benefit Pension Plan Above $15 Billion Finalists

  1. New South Wales TCorp
    Stewart Brentnall
  2. Exelon
    Doug Brown
  3. Federal Express
    Jeff Lewis
  4. Boeing
    Andy Ward
  • Rosalind Hewsenian
    Foundation
  • Anne Dinneen
    Endowment
  • Susan Ridlen
    Corporate Defined Benefit Pension Plan Below $15 Billion
  • Harshal Chaudhari
    Corporate Defined Benefit Pension Plan Above $15 Billion
  • Sam Masoudi
    Public Defined Benefit Plan Below $15 Billion
  • Jonathan Grabel
    Public Defined Benefit Plan Between $15 Billion and $100 Billion
  • Chris Ailman
    Public Defined Benefit Plan Above $100 Billion
  • Anthony Waskiewicz
    Healthcare Organization
  • Robert
    Defined Contribution Plan
  • Paul Ballard
    Sovereign Wealth Fund
  • Dan Chu
    ESG
  • David Holmgren
    Collaboration
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