A large corporation asked Milliman to help reassess its pension plan investment strategy. At the time, the client maintained a traditional policy: 70% equity and 30% fixed income. While common, this strategy allowed for significant tracking risk between the plan’s assets and liabilities, leaving investors vulnerable to declines in interest rates and increases in liabilities.
A strategy to reduce risk, weather market fluctuations
To mitigate this risk, the company wanted to fully fund its plan and lock it away. Instead, Milliman suggested an approach that would better align the company's assets with its liabilities. This liability-driven investment (LDI) strategy would enable the company to gain sufficient assets to meet all of its liabilities, both current and future. Now, the value of liabilities tracks the value of assets as interest rates rise and fall, and the plan’s funded status remains stable. This approach is especially useful in light of new laws like the Pension Protection Act of 2006, which requires that plans be fully funded.
Staying ahead of the curve with the Dashboard
In addition to adopting the recommended strategy, the client implemented Milliman's Pension Performance Dashboard to monitor and manage their plan. The Dashboard provides the client with monthly reports on the plan status, allowing it to truly measure the success of their investment policy. Now they can stay abreast of their plan's performance and make timely adjustments—a vast improvement over the old system.
A liability-driven approach to investing, reinforced by regular performance monitoring from the Pension Performance Dashboard, has helped the client's plan significantly outperform pension-funding averages. This has given them a major advantage over their competitors, who suffered 20% to 30% losses in their plans’ funded status in 2008, resulting in huge hits to their bottom lines.
With a sound investment strategy and the right tools in place, this client has stopped chasing returns and evolved into a more confident and competitive manager of pension risk.
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