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.
Sustainability trends—including climate change, multi–stakeholder driven society, resource degradation, demographic challenges, and technological revolution—have already impacted investment performance. Investors that incorporate these risks and opportunities into their decision-making frameworks are likely to be better prepared for the future than their peers.
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In this paper, we aim to assess the potential upside and looming risks for munis in the aftermath of the pandemic-induced muni sell-off and subsequent policy-driven rally. Despite the recent volatility, in our view, munis continue to be an attractive alternative to both Treasuries and high-quality corporates for long-term taxable investors.
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