The De-Risking Power Duo

Ken Frier and Gretchen Tai famously slashed risk from Hewlett-­Packard’s (HP) retirement plan at the perfect moment, just months before the worst of the 2008 financial crisis. But like most well known stories, the reality was a little less tidy, a bit luckier, and a lot more work. The pair of former HP CIOs tell the untold chapter of how they completed their de-risking masterpiece.

CIO: Ken, you enjoyed killer timing in de-risking HP’s pension plan in 2007. How did you know to do that?

Ken Frier: We knew that the biggest market meltdown of our careers was about to happen. And I also believe one should only take risk if there’s a purpose for taking that risk. HP was overfunded by 2007, and that meant there was no longer a purpose for taking risks in the portfolio. And yet, the recently frozen plan was still taking more than 60% public and private equity risk. To lock in the overfunded situation, we decided to sell higher-risk securities and replace them with long-duration fixed income. I admit it was beautifully timed. But we had no crystal ball. We took the information we had and made a smart risk management move. 

Gretchen Tai: The timing was impeccable. Ken took a total-risk view of the portfolio, swiftly decided what should be sold and what shouldn’t. It was truly dynamic de-risking—not to mention innovative. 

Frier: One thing we really deserve credit for is how quickly we were able to move. I became CIO in early 2007, we had developed the de-risking plan and had it approved by the investment committee in July, and we were hedged by November. It became clear in retrospect that if we hadn’t moved as quickly, the outcome would not have been as good.

CIO: What was it like to bring in this radical plan so soon after becoming CIO?

Frier: When my predecessor left, we also lost a few team members. So when we made the decision to de-risk, we needed someone sophisticated, smart, and a fast learner. I was delighted when the HP treasurer found Gretchen in the corporate development group. She was integral in analyzing the possibilities of de-risking the plan and helping us prepare the case to HP’s finance and investment committee. 

Tai: The biggest innovation was changing the governance structure. Along with the switch to fixed income, we agreed on pre-set trigger levels with the investment committee so we could be agile with interest-rate hedging and risk-asset exposures. We learned that without these pre-set rules, it’s easy to get stuck in analysis paralysis about interest rates, effectively slowing down decision-making and execution.

CIO: And then HP acquired Electronic Data Systems.

Tai: We used to call it Sisyphus. You know the Greek myth where Sisyphus had to roll a large boulder up a mountain only to watch it roll back down over and over again. At the end of 2007 and beginning of 2008, we had weathered the worst financial storm of our careers and proved HP’s position. We were rock solid and overfunded. The acquisition brought us back down to about 80% funded. But this presented a new set of challenges—it’s more interesting to push an underfunded plan up to fully funded—which meant we had to re-risk the plan. The markets had just crashed and valuations weren’t as unattractive as today. We were cautious and contrarian. We went into secondary private equity for the first time and got into distressed credit in a very big way to match liabilities. 

Losing Ken to Stanford in 2010 was challenging. The board and senior management had high expectations and I felt the pressure to deliver. We had turnover after Ken left as well, which meant I was tasked with rebuilding the investment team. But this also turned out as one of the most enjoyable aspects of becoming a CIO. I was able to hire more talent and form a small team with people from different backgrounds. It was a period of intellectual growth for me and the team at HP. We re-analyzed everything from how we thought about asset-class valuation to asset allocation to how we organize as a team.

When I left at the end of April, HP had gone through its share of ups and downs in funded status. We were fully funded twice, and the plan is now healthy.