The nosedive in the funded status of pension plans seen in January is a good reminder to plan sponsors that they need a plan to lock in gains.
That’s the word from Russell Investments, which noted that "the speed of the reversal (in January) had been unexpected, (and that) it’s events like this that remind us why planning is essential.”
The company argued last fall that improved funded status and favorable markets was the exact time pension plan sponsors should move to de-risk their plans to preserve gains. Companies that didn’t take action took a hit.
Both public and private-sector pensions saw their funded status greatly improve in 2013, so it came as a bit of a shock in January when some of those gains were erased.
Russell recommends that pension plans have a well-defined de-risking plan in place.
“It is likely insufficient to get closer to full funding, then take two to three months to select a new fixed-income manager or change the duration profile of (an) LDI (liability-driven investment) portfolio relative to liabilities,” the company said. “Opportunities may be missed or negative funded status consequences such as those experienced in January can be felt, unless exposures are able to be changed quickly as markets move.”
That's why de-risking and Liability-Responsive Asset Allocation schedules can be used as tools in the locking-in process, it said. “The process to de-risk a plan is usually incremental. It’s not one step and you’re done. It’s also more cost-effective to de-risk over time.”