2019 Knowledge Brokers

Jason Richards

Title: Managing Director, Retirement Risk Management Group
Firm: Willis Towers Watson
Assets under advisement: Over $2.3 trillion; AUM over $120 billion

Jason Richards is a 20+ year consulting veteran at Willis Towers Watson, working with large-scale defined benefit pension plans as part of the company’s Retirement Risk Management Group to carry out the development and execution of financial management strategies, which include plan funding and liability transfer options as well as the investment of plan assets.

Richards discussed his thoughts on the markets, particularly risks facing institutional investors, and how he and his team have been adapting to such risks in support of the clients they serve.

“Pension plans can have a significant impact on balance sheets, income statements, and cash flow,” Richards says. “Many sponsors are dealing with large pension deficits due to falling interest rates over the last 10 years, despite strong global market performance. In addition, obligations are revalued each year, with changes in interest rates being a primary driver of year-over-year changes. Because of this, pension investors are continually focused on balancing their allocation between assets that move in tandem with the liabilities—like bonds—and assets that are expected to out-earn the liabilities—like equities.

“The time it will take to eliminate the pension deficit must be balanced with the expected cost and potential risk, leading to a wide range of approaches based on each client’s objectives.”

Maintaining a Long-Term Perspective

Richards also keeps a keen eye for larger-scale macroeconomic events that are shaking today’s economy, such as the US-China trade war, or even tweets from the President, who has been known to use the social media platform to announce new policy initiatives, which subsequently have caused

fluctuations and increased volatility in equity markets both domestic and international. However, these tend to have limited impact on his advice to investors.

“What I’ve learned over time is, there are a lot of people who are a lot smarter than I am, trying to figure out what any particular event will do in any particular time to the markets. I’m never going to out-think them. So what I try to do with clients is to focus more on long-term strategy and less on short-term tactical adjustments,” Richards tells CIO.

“High-level strategic allocation decisions generally have the biggest impact on performance, he says. But, if you want to take advantage of short-term tactical opportunities, that’s great—there are ways you can do that—there are investment managers, chief investment officers, and others who do that very well. That’s not what I do very well; I try to focus on the larger macro strategy. Then, if you can get incremental value from tactical adjustments, even better.”

Richards also discussed a growing trend whereby pension plans are outsourcing their investment strategies to professional firms, much like an outsourced chief investment officer (OCIO) model. “Pension investment strategies are becoming increasingly complex and dynamic. With some concerns about continued equity growth, many sponsors are seeking increased diversification. But the options beyond global equities can be overwhelming. In addition, more sponsors are adopting glide paths or other strategies that require more frequent monitoring and adjustment of the plan’s asset allocation.”

“Some sponsors have the internal resources to effectively adapt to these changes. Others are looking to focus their limited resources elsewhere in the business. In these cases, an outsourced model can provide the necessary governance and expertise, and often at reduced overall costs.”

Richards also noted even investors with large internal staffs may find value in outsourcing a portion of their portfolio, often focused on a specific asset class. “For more complex sub-strategies—private markets, alternative credit and such—outsourcing can provide significant incremental value through economies of scale and scope.”

“If, for example, you can only invest $100 million in alternative assets, it’s hard to diversify that across a lot of investments efficiently, but if it’s outsourced to a larger total pool, you can get access to more diversification, better manager research, and better performance, hopefully.”

Richards also discussed some notable differences between different types of institutional investors, and how structural limitations help shape their portfolios and subsequently global markets.

“It’s the difference between a defined benefit pension plan as an investor, and an endowment or foundation,” he says. “For many defined benefit pension plans, especially frozen plans, there’s a point at which you have enough money in the trust to fully secure all obligations, through liability transfers and/or internal immunization strategies.

“When you’re at that point, with limited ability to use any surplus assets, the asymmetry of risk is severe. If you lose $100 million, you have to put $100 million back in. If you gain $100 million, it may have limited to no economic value. That risk asymmetry makes investors take a different approach to pensions versus to endowments or foundations, both in terms of risk/return assessment and time horizon.”

With US corporate pension obligations of about $3 trillion, pension asset management matters greatly. As Richards notes, “Between the impact of pensions on corporate finances and the effects of pension investment trends on overall capital markets, the decisions made by pension investors will have far-reaching implications.”

By Steffan Navedo-Perez

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