The 2020 funded status of the 100 largest corporate defined benefit (DB) plans by assets rose only slightly as double-digit equity returns were offset by a decline to record-low discount rates, according to a proprietary analysis conducted by J.P. Morgan Asset Management.

The report, written by Michael Buchenholz, head of U.S. pension strategy, institutional strategy and analytics, reveals the benefits that came from rebalancing liability-driven investing (LDI) portfolios during the market volatility of last year. He first points out that for plan sponsors to have meaningfully rebalanced into risk, they would have needed a two-way glide path permitting re-risking or an investment team with wide discretion; the ability to quickly raise liquidity, in the portfolio or from the sponsor; and the capacity and ability to conduct transactions on short notice.

To illustrate the potential benefits of reallocating, J.P. Morgan took a simple 50%/50% LDI portfolio and estimated returns under different rebalancing policies. Without any rebalancing, the sample portfolio—50% MSCI All Country World Index (ACWI), 40% U.S. long credit and 10% U.S. long Treasuries—earned 15.2%, a bit better than the top 100 plans’ average return of 14.2%. Rebalancing monthly back to target allocations earned an additional 80 basis points (bps), while rebalancing just once at March 31 earned an additional 225 bps.

Buchenholz notes that hedge portfolios are still the focal point of most LDI strategies, but he suggests that corporate DB plans might have put up an illusory line of defense with corporate credit.

“One of the most pernicious adversaries of hedge portfolio effectiveness is credit defaults and downgrades, generating fixed income losses and liability increases as higher yielding bonds exit the pension discount curve universe,” the report says. “Corporate bond hedges become … sources of vulnerability.”

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