As corporate defined benefit  (DB) plans consider market volatility, interest rate movements and cash flow needs, there are certain investments and strategies that investment managers suggest they consider.

Adam Levine, investment director of abrdn’s Client Solutions Group in New York City, says funded ratios for corporate DB plans improved quite a bit in 2021 both because of returns and discount rate movements, so more plans are moving into fixed income to protect their funded statuses. Closed or frozen plans, especially, are locking in funded ratios.

“We believe there are several considerations for plan sponsors when moving to fixed income,” Levine says. “They need a diversified mix of fixed income. Many plans are invested in long-duration bonds, but if the benchmark is the Barclays Long Credit Index, they might be adding more companies they already own. So clients are concerned with concentration issues.”

Levine says DB plan portfolios need to consider a number of different fixed-income options. “We’re talking to clients about muni [i.e., municipal] bonds, crossover bonds and sectors such as utilities,” he says. “It’s about making sure portfolios are not overly concentrated in one index or in the same companies.”

DB plan sponsors also need to be aware of a curve risk—i.e., a risk that while interest rates might not move a lot, the shape of the interest rate curve might change, Levine adds. It could be that DB plans’ assets have a combination of very long and very short durations, and a change in interest rates might happen in the middle of the curve, so plan sponsors could see liabilities move while assets don’t, he explains. Plan sponsors should match their assets to the interest rate curve.

Read more @Plansponsor