The pension plan environment is fraught with complexities as increasing regulation and rising costs force plan sponsors to evaluate an array of risks to meet their pension obligations.
Many plan sponsors have taken the first steps to de-risk their plans by increasing allocations to fixed income and the duration of those assets to match their liabilities more effectively. These plans typically have a number of long-duration managers with varying benchmarks that may need to be coordinated to maintain a targeted hedge ratio.
Enter the completion manager, which helps plan sponsors handle the complexities of de-risking as plans move along their glide paths. A completion manager’s role extends well beyond traditional fixed income portfolio management to include developing a thorough understanding of the liabilities, building a completion portfolio, and monitoring the plan. A completion manager often oversees all aspects of plan management to ensure these objectives are met, including risk-seeking and liability-hedging assets.
As a plan matures along its glide path, the completion manager will coordinate several tasks, including:
- Communicating among all related parties (plan sponsor, asset managers, consultants) to ensure they are on the same page regarding changes to allocations, hedge ratios, actuarial assumptions, etc.
- Measuring the risk factors of liabilities (interest rate, credit, quality) to ensure a close match with assets
- Monitoring calculations of liability benchmarks, which may change, to ensure they are appropriately hedged at all times
- Rebalancing across managers as allocations migrate from risk-seeking assets to liability-hedging assets as funded status improves
- Ensuring glide path targets are followed and implementing new targets quickly to capture market movements (which may require the use of derivatives to achieve a targeted allocation)
- Identifying gaps in a liability hedging program and filling them appropriately by maintaining a completion portfolio (which may require derivatives to achieve a targeted allocation)
- Preparing for plan termination and/or developing risk-transfer strategies as the plan approaches maturity
For plan sponsors that have reached a stage in their glide path that requires more precise customization, a completion manager can provide meaningful assistance and insights as well as help manage a fairly complex process involving many interests. Increased scrutiny on risks in a plan can lead to lower funded status volatility and a more certain range of outcomes.
Key Questions to Consider
- What are the plan’s liability hedge ratio targets and how strictly should they be adhered to?
- As the plan’s liability hedging assets increase, how diversified should our assets/managers be?
- Does the completion manager have the resources, skill set, and systems to run such a mandate?
Completion Manager Quick Facts
- Capabilities are generally offered by larger fixed income firms with resources across portfolio management, actuary science, and strategists
- Fees can vary depending on the scope of the mandate—completion services will add on to standard long-duration management fees, which can range from 20 – 30 bps
- The manager works closely with related parties—including consultant(s) and plan sponsor—to ensure plan is meeting targets