Pensions entered the Covid-19 pandemic significantly exposed to corporate credit risk, relying on a traditional investment strategy that may be heading for failure, according to JPMorgan Chase & Co.’s asset management group.

They’ve been hedging the volatility of their pension liabilities by taking on “a very concentrated exposure to corporate credit,” Jared Gross, the head of institutional portfolio strategy at J.P. Morgan Asset Management, said in a phone interview. Largely holding corporate bonds at risk of being downgraded to junk in the downturn, plus Treasuries with historically low yields, won’t work well for ensuring workers receive the pension benefits they’re owed, according to Gross.

“If a classic fixed-income portfolio is yielding 2 percent, that’s not going to get the job done,” he said. “You have a concentrated exposure in investment-grade corporate credit, which is both relatively low-yielding today and likely to be exposed to higher than normal levels of credit volatility.”

One of the most sensible ideas for pensions with liability-driven investments consisting of corporate debt and Treasuries is to move some portion into securitized mortgages — a high-quality, long-duration asset class they’ve been avoiding for the past ten to 15 years, according to Gross. He said that would create a “safety valve” for LDI portfolios designed to help pensions meet their long-term obligations to workers.

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