(January 24, 2013) – Corporate pension funds in the United States took decisive action to de-risk in 2012, according to an NEPC survey, with more than half now on track with glide paths.
“We discovered there was an absolute explosion of the implementation of glide paths in 2012,” said Bradley Smith, a partner at the consultancy, during a recent webcast. “We found this very consistent with the data from last year’s survey, where there were actually more plans in the process of building the glide path than had one in place.”
The Cambridge, Mass.-based investment consulting firm’s survey covered 74 corporate sponsors, representing more than $100 billion in pension assets.
Of those, 64% have a glide path in place, compared with just 25% in 2011. Another 25% are in the process of instituting one, while only 11% of the funds sampled have no involvement with glide paths. The firm expects small plans will surpass large plans in adopting glide paths this year. At the time of the survey, small and large plans were split 61%-70% on implementation.
As plans large and small impose target dates for their funds, the market for glide path management grows. “As you can imagine, using a glide path requires more frequent asset and liability measurements,” Smith said. “Virtually all plan sponsors that have adopted a glide path have decided to outsource the management of that glide path to a third party.”
Certain industry insiders contend that some funds will come to regret target date-based outsourcing. Arun Muralidhar, author and the chairman of Mcube Investment Technologies, gave the glide path marketplace a scathing assessment in a recent column.
“This form of rebalancing is a tactical bet and there are better and more intelligent ways to do this,” argued Muralidhar, in “Off Target Date Funds” from aiCIO’s recent LDI issue. “If rates keep sinking across the globe and debt levels keep rising, adding to fixed income is like pouring gas on a flame.” Furthermore, he contends that glide path outsourcing creates a flawed contract between plan sponsors and asset managers: “In making a single selection of a fund based on one’s retirement date, the participant delegates many decisions to the TDF vendor yet bears all the risks if the vendor messes up … If the vendor is incompetent in any or all of these areas—and many participants will discover this incompetence only 25 years into the future—they have already paid rich fees for the privilege of being left in retirement penury.”
But as Smith pointed out in his webcast, very few corporate plan sponsors have the infrastructure, expertise, or desire to implement and monitor a glide path purely in-house. In its survey presentation, NEPC points out that plan sponsors can better reach de-risking events with frequent monitoring of funded statuses, “transaction costs need to be well managed.”
Related data: The 2012 Liability-Driven Investing Survey