$20 Billion Club: De-Risking Gathers Pace

Corporate pension plans upped their allocations to fixed income last year as the asset class performed strongly and investors sought to de-risk, according to a report from Russell Investments.

“For some, the historic improvement in funded status experienced in 2013 was the push they needed to dial back risk.” —Justin Owens, RussellOf 19 US pensions with more than $20 billion in assets covered by the report, Russell found that nine had increased their investments to fixed income by at least 4%. Since 2010, the average commitment to the asset class rose from 34% to 40%, with five pensions investing significantly more of their portfolios.

“For some, the historic improvement in funded status experienced in 2013 was the push they needed to dial back risk, as they sought to ‘lock in’ the gains they had realized,” said report author Justin Owens, senior asset allocation strategist at Russell. “We expected that the improved funded status would trigger moves toward more fixed income, particularly since several among this group have adopted de-risking glide paths.”

AT&T, Exxon, Ford, and IBM were among those making purposeful shifts into fixed income, Owens said. “These are not subtle shifts that occurred by chance, but conscious changes sponsors made to their strategies, to help them achieve their objectives,” he added.

The rise in fixed income allocations coincided with an increased focus on asset-liability matching, Owens added. After a major shift by six members of the “$20 billion club” towards de-risking strategies in 2012, by the end of 2014 16 of the 19 members “disclosed asset/liability priorities, with many making these metrics their top priority.”

Last year’s moves were made “perhaps in anticipation of a tough year developing”, Owens said. Over the course of the year, while investment returns averaged more than 10%, the overall funded status of the $20 billion club pensions dropped 6% due to falling discount rates and new mortality tables.