Case study: Actuarial and investment consultants join to develop DB plan's new investment policy

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By Matt Albano | 01 January 0001

A not-for-profit organization decided to combine its defined benefit plan's actuarial and investment advisory work under one roof. Because of our strength in employee benefits and independence from the investment management industry, Milliman was a clear fit to assist the organization in meeting its goals.

Milliman investment consultants worked together with the plan's Milliman actuary to develop a new asset allocation.

Data gathering exposes plan's strengths

Prior to drafting the plan's investment policy statement (IPS), the actuary completed the plan's actuarial valuation report. Items from this report of particular importance for developing the IPS were:

  • a detailed summary of the expected cash flows of the plan
  • the percentage of liabilities that are currently funded
  • the target rate of return the plan expects in order to fund its liabilities
  • duration of the plan's liabilities and assets

The valuation showed that the plan was very well funded in terms of its future liabilities, had a relatively low amount of cash outflows over the next few years compared to its level of assets, and had a fairly young population with a longer time horizon to retirement—a comfortable financial position for a defined benefit plan.

Forming strategy with higher risk/return profile

Using capital market assumptions developed in house and the results of the actuarial valuation, the investment consulting team prepared an asset allocation and investment strategy that allowed for a somewhat higher risk/reward asset allocation than was currently being used. The higher risk/reward allocation took advantage of the plan being well funded with low cash outflows in the short term, and sought to minimize the cost of the plan to the organization by growing the asset base from investment returns, rather than employer contributions.

In addition, Milliman provided the plan sponsor with tools to align its long-duration liabilities with appropriate fixed income investment options.

The organization accepted the changes within the IPS and understood that the IPS is a "living" document that will likely change over time as different economic and demographic conditions arise.

Implementing the strategy—strategically

Because of the shift in the asset allocation, a sizable amount of money needed to be shifted between investments within the plan. The organization did not want to make the changes all at once for fear of being exposed to a market correction. Instead, it was interested in exploring the possibility of shifting the assets over a longer time period through scheduled periodic transactions, a process referred to as "dollar-cost averaging." This process attempts to minimize the affects of short-term market movements while assets are being bought and sold and helps progress asset allocation toward the investment policy target.

Milliman was able to leverage several different systems and put together a process that slowly shifted the assets in the plan toward the newly developed policy allocation without having to worry about timing the transactions correctly or causing the plan to incur high transaction fees.

By using both Milliman actuaries and investment consultants, the plan sponsor was able to align the investment policy with the plan's actuarial status and demographic realities. The joint team worked toward a common goal of reducing the future cost volatility of the plan while maintaining the current secure financial condition.

This strategy and implementation were unique to this client and plan; as above, Milliman tailors its guidance for each client based on its situation and objectives.