The Forgotten 70%: Strategies for Pension Plans Accruing Benefits
- While up to 70% of all single-employer pension plans have participants who are still accruing benefits, risk management solutions discussed in the pension community typically focus on the needs of the other 30% of plans—those that are hard frozen.
- The mechanistic “glide path” approach tailored to hard-frozen plans is likely suboptimal for accruing plans, as it would lock in the need for permanently higher contributions.
- We recommend a more flexible, holistic risk budgeting approach that seeks to maximize expected return subject to each sponsor’s unique risk tolerance.
- Pursuing excess returns through active, alpha-driven strategies is particularly valuable for accruing plans, which face many years of future benefit accruals that must be met through either asset returns or contributions.
Many defined benefit plans sponsors may be denying themselves valuable opportunities to generate additional returns by overestimating their liquidity needs. Targeting a liquidity supply/demand ratio of 2x–3x can help portfolios tolerate periods of market stress.
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While alpha is commonly recognized as a key lever in maintaining or improving funded status, it is often mistakenly limited to purely equity or lower-liquidity investment opportunities. For plan sponsors, this can be a costly misconception. Cambridge Associates’ research shows that active fixed income management can contribute valuable alpha, resulting in significant benefits to plan outcomes.
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