WTW Backs Hibernation, OCIO, ESG and Diversification in Recommendations for 2023

Report outlines seven moves pension funds should be making in an uncertain economic climate.


WTW included outsourcing and derisking among its recommendations for pension funds and retirement plans, in its “Top Investment Actions in 2023” report. Other recommendations were for defined benefit pension funds to consider outsourcing their investment operations and for defined contribution plans to contemplate utilizing pooled employer plans.

“Don’t let resource constraints limit your return potential,” the WTW report stated. “Leverage a team of full-time investment professionals to manage the details while you focus on the big picture. DC sponsors should go a step further and investigate the potential benefits of a PEP (pooled employer plan).”

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Overall, the firm’s report noted that in 2023, there will be a continued focus on defined contribution plans, rather than defined benefit plans, as the primary retirement benefit for many employees.

The WTW report said corporate pension funds should “re-evaluate (their) primary objectives and long-term goals” after the American Rescue Plan Act and Infrastructure Investment and Jobs Act adjusted pension funding rules.

Plan sponsors may be planning for their eventual exit strategies, contemplating the impact of the new funding rules. WTW wrote, “DB sponsors should evaluate a ‘hibernation’ strategy that seeks to minimize risk while still leveraging asset returns to reduce the cost of exiting the plan over the long term. DC sponsors should embrace the meaning of a DC ‘retirement plan’ and kick off the new year by considering ways to move the needle (by reviewing plan structure, on DC plans.”

In 2022, the value of both pension assets and pension liabilities has declined significantly because of the dramatic rise in the discount rate as risk assets sold off. The reduction of liabilities, with a higher discount rate, outpaced the reduction in asset values, leading to higher funding ratios.

Though higher interest rates have led to better funding ratios, higher discount rates will increase the interest cost of liabilities going forward. In lieu of higher interest rates and inflation, the WTW report emphasized that “assets must work harder to keep up as liabilities grow faster and spending needs soar. Update return targets for pension assets and add financial wellbeing resources and income solutions to support DC participants.”

The WTW report advocates for pension funds to use active management, derivatives for liability hedging utilizing LDI strategies and private assets when available. The report calls active management more valuable in times of uncertainty and market volatility.

In the report, WTW also warned that plans hedging liability solely with long-term bonds are leaving themselves exposed to duration risk more obliquely following this year’s rate hikes, as the yield curve inverts with the 30-year treasury pegged below 4%. Private-market allocations are attractive, as they allow pension funds to take long positions that insulate them from short-term market volatility.

The report claimed investors often of private assets and suggested, “Don’t limit your potential. Ttake advantage of the rich opportunity set in private markets and utilize more-efficient hedging instruments.”

With an outlook of a moderate recession in 2023, the WTW report advised that pension funds orient portfolios toward income-generating assets, such as real assets and diversified credit.

In fixed income, the WTW report advised pension funds not to lend and when risks overlap with their equity portfolio holdings. To alleviate concentration risk, pension fund investors could diversify across the capital markets beyond corporate bonds to include , sovereigns, emerging markets and private debt.

“With uncertainty ahead, stable income from high-quality cash flows can increase stability and resilience,” the firm wrote.

The WTW report recommended that pensions build a robust portfolio that can withstand a broad range of market environments, saying hedge fund allocations are a way of obtaining true diversification. “Find out how the new generation of hedge funds can help you access true diversification,” the report advocated.

Finally, as long-term investors, the WTW wrote that pension funds should have a long-horizon mindset while integrating environmental, social and governance factors and effective stewardship to, “protect and enhance portfolio outcomes,” according to the report.


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