(February 1, 2012) — Many pension plan sponsors will make larger contributions to their pension plans in 2012 than they have in previous years, according to new research by Russell Investments.
As a result of institutional investors putting more and more money into the market at the same time, investors should be aware of the danger of ‘crowded trades’ distorting the market as investors try to buy and sell simultaneously, Bob Collie, chief research strategist of Russell’s Americas Institutional business, told aiCIO. “Overall, the general need for higher contributions among plan sponsors is not surprising as many factors have aligned,” he said, citing falling interest rates, higher liabilities, and the Pension Protection Act’s (PPA) redefinition of shortfall requirements. “Perhaps the single most important factor is the way that the PPA has redefined how plan sponsors must make up a shortfall. When there’s a shortfall, the PPA now says plan sponsors have seven years to make it up. Previously it was roughly double that. So it means contributions are now much more responsive to changes in the market situation,” Collie said.
According to the newly released paper — titled “Strategies for large pension plan contributions” — Russell anticipates most plans to allocate contributions in three major ways:
1) In line with the current strategic asset allocation policy — the default approach for plans that do not have a liability-responsive asset allocation (LRAA);
2) Entirely to risk-hedging assets; or
3) In a way that brings the new allocation in line with the next step of an LRAA schedule.
Russell’s research follows a report released in December by Mercer that showed that the outlook for 2012 pension plan contributions and expense is bleak. “Even though discount rates moved somewhat higher during November, they are likely to be in excess of 40 basis points lower at the end of this year than they were at the end of 2010,” said Kevin Armant, Principal in Mercer’s Financial Strategy Group, in a statement. “Because equities have also underperformed expectations, corporations who use a December 31 measurement date will likely see larger pension liabilities on their balance sheet, as well as higher 2012 pension expense.”