Case Study

Aon-Static Allocation to Full Termination-Case Study

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e Situation A corporate plan sponsor with an approximately $1 billion pension liability wanted a strategy to terminate the pension plan within a few years. The investment committee shared that the pension trust historically had been managed using a static allocation with 70% return-seeking assets and 30% fixed income assets. The trust was mainly frozen but had a small group of active employees continuing to accrue benefits. The manager structure was relatively streamlined, with substantial use of passive equity, low to moderate fees, and a moderate number of managers. The return-seeking assets were overweight U.S. equity compared to market weights, while the fixed income assets were intermediate duration (core fixed income and TIPS) and provided minimal liability- hedging. The company viewed its pension liabilities and expense as a distraction from its core business and wanted to reduce their impact on the balance sheet and income statement. Although the managers had performed well relative to their benchmarks, the committee recognized that an asset- liability framework was needed to reduce funded status volatility and provide a path to plan termination. e Process In order to develop a solution, the Aon investment consulting team held an initial planning meeting with members of the client's investment committee to analyze the current asset-liability profile and determine objective(s) for the plan. The client indicated that the primary objective was full or partial plan termination. Shortly after the planning meeting, the Aon team presented results with de-risking elements (hedge path and glide path). Aon proposed repositioning the manager structure to improve hedging (transition to long duration fixed income), reduce fees, and reduce tracking error (switch to passive equities). The Aon team held a follow-up meeting to review the impacts of various contribution strategies and evaluated additional options to manage/reduce pension-related costs/risks (e.g., permanent lump sum feature, small benefit annuities). All factors were incorporated into the overall strategy, which was presented to the full investment committee. Once the strategy was determined, the investment committee reviewed governance, monitoring, and execution of the strategy. The investment committee decided to delegate operational elements of the strategy to Aon, which would allow the client to react quickly to market changes. e Solution The investment committee worked with Aon's investment consulting team to develop and implement a glide path, create an interest rate hedge path, transition the fixed income assets into actively managed longer duration securities, and convert the return-seeking allocation to a 100% global equity index fund. Initial changes to the trust included: • Developing a glide path to reduce return-seeking asset targets over time with funded status improvements. The glide path used an economic liability metric to determine funded status, which incorporated costs to terminate the trust. • Creating an interest rate hedge path that would increase the hedge ratio based on funded status improvements and/or increases in the discount rate. The committee balanced the need to reduce interest rate risk in the trust with the desire to potentially improve funded status in an expected rising interest rate environment. • Transitioning the fixed income assets from intermediate duration products to long duration products. The new managers also implemented an overlay in order to adjust portfolio duration to match the liability duration. Case Study Navigating the Pension Plan from Static Allocation to Full Termination ere is no guarantee that results or savings will be achieved if you should select AHIC and/or its affiliated entities to provide services to you. e experience described in this document does not represent all recommendations made to clients nor does it represent the experience of all clients. e reader should not assume that an investment in any securities identified or a particular recommendation was or will be profitable or favorable.

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