Plan sponsors monitor COVID-19, U.S. election-driven investment risks

Pension CIOs are not making any big asset allocation moves, according to consultants that are closely eyeing the impact COVID-19 and the outcome of the U.S. Presidential election may have on market sentiment. An NEPC survey released this week found that more than 40% of corporate and healthcare pension plans are concerned about the threats that COVID-19 present to their investment program, along with nearly one-quarter of corporate plans with worries over the U.S. election. The consulting firm surveyed respondents representing more than $101 billion in assets. They found that nearly half or 45% of healthcare pensions saw COVID as their top concern, while 38% of corporate plan sponsors did. When it comes to the election, only 23% of healthcare plan sponsors see the election as their top concern. “Pension plan sponsors are facing headwinds, but our survey shows they’re not getting distracted from their long-term investment strategy,” said Brad Smith, partner at NEPC and member of the firm’s corporate defined benefit practice group. He added that plan sponsors have remained disciplined during a volatile year and continue to manage new risks even amid the COVID-19 and election uncertainty. Among the largest plan sponsors with more than $1 billion in assets, 54% issued debt in 2020, perhaps taking advantage of low interest rates. Most said it was used to help finance company operations, but 39% said it was used for other items including for additional contributions to the pension plan and share buybacks. The majority of investors surveyed by NEPC are maintaining exposure to value equities. Of the poll respondents, 77% said they are making no changes to their value equity managers; 12% are rebalancing proceeds to value investments from growth managers. Among those polled, 7% stated they are reducing allocations to value equity managers and 4% do not have an allocation to value today. Meanwhile, consulting firm Mercer reported that the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level in September at 83% as a result of a decrease in equity markets offset by an increase in discount rates. As of September 30, 2020, the estimated aggregate deficit of $433 billion remained unchanged as compared to $433 billion measured at the end of August according to Mercer. The S&P 500 index decreased 3.92% and the MSCI EAFE index decreased 2.90% in September. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased from 2.46% to 2.53%. “Funded status was flat month over month as equity market declines were offset by a rise in interest rates,” said Scott Jarboe, a partner in Mercer’s Wealth business. “We saw the S&P 500 pull back after reaching an all-time high in August and interest rates rose slightly during the month with the Fed indicating they would keep short term rates low for the foreseeable future.” Mercer is recommending that plan sponsors understand the sensitivity of pension liability and expense in light of the persisting low rate environment and potential for a pull-back in equity markets in approaching the election and end of the year.

Plan sponsors monitor COVID-19, U.S. election-driven investment risks

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