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Top ten investment actions for defined benefit plans in 2021

COVID 19 Coronavirus

November 9, 2020

Everything has changed, so why are we doing the same things?
Too tired to read? Listen to the paper instead.

2020 changed everything. It tested our resiliency to financial pressures, time scarcity, cost control and a virtual world. Many decisions made pre-pandemic are less relevant today. The new world and economy require us to find new ways to meet retirement plan objectives while efficiently managing resources, time and expenses. If there was ever a time to reconsider our process, it’s now. Continue reading to discover how you can adapt to our new normal in 2021.

Realign resources and behaviors to make better decisions

We saw significant dispersion in plan sponsor behavior in 2020. Some found it harder to make and execute decisions in the new environment, whereas others found it easier. All can improve in 2021.

  1. 01

    Enhance governance structure and framework:

    Standing delegations for dynamic activities, such as re-risking, rebalancing and raising liquidity, can help create value and limit erosion of assets. For example, clients who rebalanced their portfolios quickly following market sell-offs in March were better able to capitalize on the rebound later in the year. If you find yourself spread too thin for day-to-day actions like this, now is the perfect time to revisit resourcing.

    More plan sponsors are delegating investment execution to a third-party to focus more of their time on key strategic issues

    In addition, more plan sponsors are delegating investment execution to a third-party to focus more of their time on key strategic issues. See our recent paper, “Trends in retirement plan investment governance,” to learn more.
  2. 02

    Leverage manager skill and specialization:

    Passive management may lead to more risk and return concentration than intended. Most equity indices have significant concentration; for example, five technology companies comprise a whopping 23% of the S&P 500, as of October 2020. For bond investments, passive management may not adequately compensate for downgrades and defaults. Reconsider your active management beliefs; skilled managers may help you better manage risk and earn higher returns during a dislocated market recovery.

We take a different approach to equities. Watch our video

  1. 03

    Integrate inclusion and diversity (I&D):

    I&D has been a growing topic for organizations, not just in how they operate but also in how they manage pension assets. Plan sponsors who aren’t examining diversity within their portfolio and internal processes risk being left behind as the industry moves toward greater awareness and action. Our recent thought piece, “Diversity in the asset management industry,” shares our approach and potential actions plan sponsors can consider taking. This includes measuring diversity and examining requirements for new managers.

Transform your risk management approach

Risk management continues to be a key differentiator of plan outcomes, and the following are opportunities to increase the resiliency of your approach.

  1. 04

    Reassess your risk tolerance:

    The current crisis has undoubtedly stressed many companies while creating new opportunities for others. Changes in your other business risks affect your benefit plans and vice versa. For example, unwanted cash demands or pension-related costs flowing through company may exacerbate financial pressure. Examine the pension plan’s contribution to enterprise risk as part of a risk tolerance assessment to help reduce unwanted surprises and further focus on compensated risks within your plan through an asset-liability study.

  1. 05

    Harness illiquidity:

    We always advocate holding some cash to pay benefits and provide liquidity. This became particularly important over the recent market turbulence; however, we believe many retirement plans have gone too far, missing good opportunities for return generation that are especially important in today’s low-yield environment. Unless you’re planning to exit the plan in the next few years, you likely have some tolerance for illiquidity. Use a breadth of investments across private equity, real assets and private debt in an effort to provide excess returns, generate income and deliver strong cash flows.

  2. 06

    Flex your assets in line with broader plan management:

    Your plan may have struggled with deficit increases resulting in higher contribution requirements, or you may have weathered the storm so well that you’ve kick-started the “end game.”

    We believe your investments should retain flexibility to effectively support your funding situation, journey plan progress, and planned and unplanned lump sum distributions. As things unfold, make sure your asset and liability teams are dynamically integrated to ensure the level of investment risk, liability hedging design and liquidity continues to be appropriate.

  1. 07

    Achieve the best bang for your buck:

    Bucketing assets into return seeking and liability hedging may not be optimal. Some investments can deliver multiple benefits, while other play a specific role in the portfolio. For example, long Treasuries hedge a significant percentage of the volatility of liabilities while also benefiting from a flight to safety during a crisis. This can free up additional capital to target more return-seeking assets. Avoid anchoring to a strategic asset allocation and instead focus on ensuring that every dollar is efficiently invested.

New world, new economy = new approach

Market turbulence, stimulative policy and changes in lifestyle resulting from the virus have created questions about whether the traditional business and economic cycle still exists. What should you do differently when so much has changed?

  1. 08

    Exploit unpredictability:

    Market disruption seems to be part of the new world. Monetary and fiscal policy stimuli are interrupting traditional business cycles. City centers may never recover if virtual work and suburban flight are permanent. Make sure your portfolio is well positioned to benefit from the new, unpredictable world by accessing less cyclical investments. We feel you should capture nontraditional exposures within liquid alternatives, opportunistic credit and specialized real assets.

  1. 09

    Get smarter on sustainability:

    Sustainable investing is a hot topic and can mean different things to asset owners and industry participants. A first step is to understand sustainable investing terminology, approaches, trends and regulation. Quantify the big-picture impact of emerging risks, such as climate transition risk, on your portfolio. At a more granular level, engage your investment managers to understand how sustainable investing is integrated into their processes.

  2. 10

    Seek to improve value for fees and time:

    Don’t simply assess the cost of your plan as the totality of the fees that you are paying. The lowest fee solution is not always the best solution. Instead quantify the return enhancement or risk reduction of each additional dollar or hour spent. Spend money and time where it is sufficiently well rewarded. For example, the benefits of hiring skilled active or specialist managers may substantially improve your total return profile at a surprisingly low cost.

    Pie chart depicts each of the ten actions highlighted on this page
    In 2021, plan sponsors should consider realigning resources, transforming their risk management approach, and recognizing that a new world and a new economy will require a new approach to managing a DB plan.

Importantly, we believe that these actions are linked. Taking one action will make your other actions easier and more effective. You can enhance inclusion and diversity as part of a broader governance assessment. You can determine your tolerance for illiquidity as part of reviewing your enterprise risk posture. And you can leverage manager skill and specialization to exploit unpredictability. So, make a plan for how 2021 will be successful, and remember that just a few small steps can quickly turn into a giant leap forward.


The information included in this presentation is intended for general educational purposes only and does not take into consideration individual circumstances. Such information should not be relied upon without further review with your Willis Towers Watson consultant. The views expressed herein are as of the date given. Material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Willis Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this presentation should not be relied upon for investment or other financial decisions, and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this presentation to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

Willis Towers Watson is not a law, accounting or tax firm and this presentation should not be construed as the provision of legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with their legal counsel and other professional advisors as appropriate to ensure that they are properly advised concerning such matters. In preparing this material we have relied upon data supplied to us by third parties. While reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party.

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Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson and its affiliates, whether for its own account or on behalf of others, may not necessarily reflect the views expressed herein. Investment decisions should always be made based on an investor’s specific financial needs.

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