Mike Moran, senior pension strategist for Goldman Sachs Asset Management, discusses how COVID-19 and the resulting market volatility have impacted defined benefit pension plans and participants in defined contribution plans, and what to consider going forward.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged Goldman Sachs when we discuss developments currently shaping markets industries in the global economy. Objection. go ahead of complications heard the fern returned plants, like many other, as plans about a rocky ride. In two thousand twenty common nineteen and the resulting market volatility had been up to bolster defined benefit and defined contribution. Plans today will examine what the impact has been this year. Return investors should be thinking about going forward? This is more, is might Moran pension strategists in Goldman Sachs man or cheese sandwich MIKE I'd rather be Jake she's been interesting year. How the events of twenty twenty had an impact on various defined benefited defined contribution pension plans for investors
Like all investors, twenty has been a bit of a wild ride for retirement plan. Investors, and I was just but we want the volatility at times has been disconcerting. It is important to keep in mind that these are long term and bastards. They have also but allow me to find benefits. I that will be paid out over many decades, made a fine talk Vision participants are funding retirements last again, a very long period of time. So in many ways they can have the benefit of looking past. The short term results in short term volatility and twenty twenty two. Having said that, it has certainly been a challenging year when we look at defined benefit pension plans and we looked at their funding levels, which is better Fifthly, the ratio of their plant assets to play and liabilities many defined benefit plans, in particular, in the corporate space, have seen no splendid levels drop. This year allotted is due to the low wage restraint Byerly. What we look, the contribution plans and we look participants in those plans- hobbies
every defined contribution participant is going to have a different acid allocation itself directed, but if we can target date- funds, for example, as a proxy for defined contribution, results, Julie. First, three quarters of the year. I ain't been up, let's call it. The almost single digits are the Good NEWS. Is they ve been passed, the bad news is it's only modest returns, so twenty twenty has been challenging for both of these types of plans to five benefits and define our tradition. I think I'll be even more challenging for many of them is going to be the outlook going forward, as it looks like low interest rates are going to be here for a while and we're probably entering a period of low returns across a wide variety of asset classes, stop illumine back to find every plans you reference des by every monitor, back they recovered and at the end of the corridor, close often highs. So why would fine Beth it plans still the climate funded ratios enhance our work. sure so I'd really high like reason, and they both really relate to the liability side of the equation.
When you have long term liabilities. Low interest rates are not your friend. So when you think about corporate pension plans, the way dying. Their liabilities is based on market interest rates, so interest rates have fallen this year. That is, the value of their liabilities and that's how too depressing effect on their funding ratios now occasion plans by their liabilities differently. They dont generally use market interest rates they use- refer to, as the long term expected return on their plan assets, basically looking at their diversify portfolio, what they think on average, that's gonna hurt in the long term, while even though some to market every day, those assumptions had been coming down, primarily due to or partially should be able to follow. frightened by so again as those in bastardy bring down that long term return assumption. It has an upward effect, liabilities and that helps to depress fund Eurasia is the an issue that many of these plans are dealing with them defined benefit space, is there
Many of them are cash flow negative, and what I mean by that is the money going out to pay benefit. Payments is higher than the money coming in from contributions, not just to be clear here. That's not a bad thing that there came benefit payments, that's what the assets are. Therefore, there not fair to growing perpetuity there are there to paper These events, but when you pay dollar of benefit payments? Your assets and liabilities go down by the same amount, so your dollar deficit doesn't change, but if you're under it as many these plans are today your percentage. The ratio tends to four and seven We are both related more. The liabilities out of the equation of alive, This comes back to that in the long term is made. some. You know sponsors of these plans, whether they be corporations or government, the lights. It is difficult Do they need to increased contributions going forward which again could problematic for some sponsors, given the difficult economic environment.
Yeah, and especially with the outlook for interest rates being as the press as it is for a longer time, having defined benefit investors? find the market environment. Twenty twenty. I mean these long term investors by a given the drawer, These are funded levels here today have been made. the changes to their portfolios, to sort of both at that and howling briefings Jacon, the one thing that basically every pensioner plantier, most of them did back in his frame was revolves. Their portfolios right, equities had sold off so many plans away equities in relation to their strategic targets, so they re sickly buying equities to get back to strategic targets, that's a prudent mismanagement, all that obviously or job by well. Given they re about an equity markets. The second that some of these plans did was really work under the hope within sight. Different asset classes offer reasonable within your fixed income allocation, given that credit, France had widened now during the pandemic. Parade of March and April, and given that we must raise. Our treasury rates have fallen, many lives,
to reposition their fixed income for fully us any more credit taking our liberal rates exposure, and they were certainly doing things like that within other ass, a class as well. Can it getting under the hood and see how to the position within each of those asset classes and then to the extent that governance model allow them to do it. Many them the opportunistic strategies, whether it be distressed at or some other opportunities to be tactical. get bandages somebody's locations in the market doubt something and are not set up to indicate the governance structure to come and take advantage of that. But some are- and I think, those that did probably look back as it is a good move so, as we look forward to the next year. We are more normal year, but who's to say one of the west. Thinking about for next. So I, again. I would highlight three or four things that are probably on their radar screen number one comes back to something we ve talked about already, which is how do we achieve my long term expected return on acid target in what will
we be a law return environment. Many these plans in the defined benefit space, whether their corporate one publics. lower that assumption in recent years, but many of them still maintain assumptions are a nominal return target of around sixty percent. So how do we achieve that? When tenure treasuries are around seventy basis? Points when equities are closed all time eyes? How are you actually going to achieve that return target in what will live maybe a low return environment. The second thing active contribution policy, given the fact that, for some plans, funded levels have fallen this year. They may be. thinking about what's the right contribution policy going forward in particular give for what are you, a corporate or a governmental sponsor? You're revenues may be down this year, given the economic environment has obviously been a difficult year for many sponsors of these plans from their business perspective and Third, I would say, is how to think about managing distributions, and this comes back to what we talked but earlier about being cash la negative. As these plans, mature, has more power citizens, are in payment mood. The doll
is going out the door start to increase again. That's what the since they are forced to pay benefit payments, but as a long term investor. How do you manage the rest of your portfolio when Assets are being depleted through these distributions. That's a challenge for a lot of organizations as they think about, especially after looking to enhance that return. Assumption they going into more eloquent asset classes, swans ages, alot under agenda right now, and a lot of it comes back to how are they gonna, navigate their markets and their own plans So, on the defined benefit side, you have professionals, market professionals, investment professionals, making these decisions on the individual side as it looked any different of individuals and the defined contribution and 401k plans have they done this year. In general? There is, as usual, there's why dispersion results, but if I look again at targeted funds and think about that is a proxy for returns and networking you're, seeing many defined contribution participants with most single digit returns, which is obviously better than a loss by problem
we below what they targeted as a return for the year, I say The challenge for the fine contribution participants comes back to the economic environment and what it may mean earnings, generation ability and twenty twenty and therefore their ability to save and these plans. We all know that a key part for participants in defined contribution plans in turn, generating a retirement pool is continue inconsistently, say, while if you have to cut back on that savings that a fine contribution plan, because is going on in the economic environment that may be a challenge in charge. Your ability to grow that assets going forward. The One thing that I would just point out in terms of defined contribution plans- and this isn't really necessarily specifically twenty twenty or co bid, increasingly there's more demand for participants to have some sort of retirement income solution when you think about that a contribution plans, the majority of those assets, are controlled by participants over the age of fifty budget funding. Surprising if I may, twenty five year old, I just started my career. I may be
defined contribution plan, but I haven't really saved enough, yet I'm at the lower end of saving spectrum, if I'm in a participant, I've saved up, invested a compounded, returns and now start to figure out how to actually translate that into retirement income by attention. I used to get defined benefit programme, so I think when twenty perspective for defined contribution, plans and participants when a challenging year again, some of it has to do with what's going on the markets, but some, but has also deal with their own personal situations, so much as you talk about a defined contribution. Spacey Ravin scuttle times twenty funds, which are relatively new phenomenon, give assistance of housing, grown overtime and wet scale of that relative to dress the mark. Only about targeting funds. They have grown a lot over the last decade or so and now, target date funds within four. Why can't plans account for over thirty percent of plant assets? I'm awake the contributions from participants,
the lion's share of contributions to targeting funds today, whether there are qualified default option or not. individual investors notorious for a time the market chase performance, often selling at rose and buy it eyes. Did you see many making changes like that in there for one good plans trading in our positions? Someone looked at reports from record keeper activity this year. I would say to him this majority of participants really didn't, do anything, and that's probably a good thing as to your point, eight typically the past. Sometimes you ve seen these participants workaround therefore is trading in and out. So I think Some cases not doing anything was probably the right answer. Why? asked majority them. Maybe not do anything. I think a law that has to do with the growth of targeted HANS and manage accounts over the past ten to fifteen years. You, when you haven't targeted, fonder, managed account. You have a diversified portfolio. Is fashionable managed is revised as appropriate. So as a participant
I really feel the need to actually do anything, that's being done for me where we did see changes, but we did see participants, maybe moving money around. It tend to be more with those who are self directed so they're, not an eternity fund managed to counter picking her own investments. Probably not surprisingly, during the was quarter and into the second quarter. You canyon. See the activity there be selling out of activities and going the capital preservation options. Life stable by you and money minded probably not surprising that pretends to happen when you see periods about civility interesting and our team has done some work on. This is what has happened since then, as more three poverty disease participants go back in, What is an answer was generally now, and when we look at history we find them. While they tend to once they kind of come out of activities and maybe stable guy or money market Bengal, I can do a fixed income option, but not necessarily in equities again, maybe a recognition by some that they may have
had too much equity risking their poor. Fellow to begin with, it comes back to the vast majority. These assets are control by all participants who are either in returning thinking about retirement. getting raise retire and therefore a lot of times- and you have. These periods of volatility you selling out about what he's going into a capital preservation option sell down, they made unnecessarily go back and equities because they I had the realisation of the had too much risking their portfolios fastened. the upcoming EU, US presidential election could It is even more volatility in equity markets in brass fixing, the market as well. How should return and plan investors take this into consideration as their thinking about ass, an allocation and their their investment strategies Come back again to the point that these are long term investors, the tremendous maritime, especially in the fine benefit side thinking about there teach a gas allocation which we all know is the biggest driver returns in the long run. So while there maybe
particularly over the next few weeks and months. I think it's him for these investors to keep in mind. We don't want it have short term volatility. Getting us aware, distracting us from a long term strategy that we put in place and that we spend at a time, developing, however, it could be a good opportunity for some investors, and particularly individual investors, to once again re examine their tolerance for rest and actual How do we saw in the March people time period some defined contribution, participants setting out a back. When he's going into capital preservation options, they may have that realisation at the time, too much rescue my portfolio, maybe given on my own personal circumstances, maybe I'm only a year to away from retirement. I can't stand it. volatility. So given We may be entering a period of increased volatility across different asset classes. It may be and for some individual investors to once again, religion hard look at home was risky, but we want to have an air portfolio, and maybe me adjustments appropriately so big,
what would you take away, spur overtime and plan investors both on both sides of the tv seaside? I'm gonna give you five Jake, which knows a lot, but there's a lot to unpack your allotted, as we have already discussed. So the first thing, I would just say, is again: let's keep in mind. These are long term goals of assets. Torture volatility can be disconcerting, but plans have long time horizon anyone. a state with a long term plan has been put in place. However, number two seconds. It should be adopted potentially reexamined. Rest tolerance in particular for individual investors, but even defined benefit side. Professional investors. We work with a lot of fires, especially on the corporate side, where the plan is well funded, maybe club in frozen it's not for only benefits for participants, their means be a need to take up much risking the portfolio, and therefore this is the time to maybe re, examine the strategic ass, an allocation and investment strategy. Third governed
these corporations and individuals may need to reset expectations about how much they're going to have to contribute in saving these plans in the coming years and some Finally, we need to increase their contributions in order to adequately fund these long term liabilities given I just what's happening: twenty twenty with markets and potentially with funding levels, especially on the fine benefits I'm going lower, but also forward and what am I gonna around my portfolio going forward? The real be that as it may be less than what we ve done in the past. So far, What, then, is that, given expectations that for looking returns, maybe the low historical returns, all investors may need to rethink the rest allocation and investment strategy. If we think about a standard, sixty forty index portfolio, it's likely in the foreseeable future. That may only yield nominal returns of around forty five percent. So investors either need to accept those returns? Work other strategies in an attempt to achieve higher returns, and this could involve the use of more private assets and alternatives.
Re examining were employing active management may make sense for certain asset classes, and then finally, I would just say, demographic changes. The aging of America means that many of these plans are in distribution as ours. increased for defined benefit, planned payments and with individuals, withdrawal from defined contribution plans to fund their own retirements, manage these outflows will take on increased importance in particular, hey participants seek retirement income, solutions that will work. Retirement income, solutions that will allow them to convert. Therefore, one came defined contribution savings into it. Timing comes from Might there is a lot of ground to cover quickly thanks for joining us today, I haven't you jack. That concludes this episode. Exchange common sacks thanks for listening and if you join the show we subscribe enough, The planned gas, the meagre radio comments and pleased to later this week for weekly market update, were leaders ran affirmed, thereby could take on the latest in markets. This package, is recorded on Friday October, setting
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Transcript generated on 2021-07-01.