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Investing during the coronavirus crisis

Investments
COVID 19 Coronavirus

By Alex Slivinski | June 9, 2020

Calls to action for pension plan investors.

To help our clients think through the short- and medium-term actions, we recently hosted a webcast covering the issues impacting defined benefit plan sponsors and investment portfolios during these challenging times. Prior to the webcast, we surveyed U.S. plan sponsors, and discovered that their biggest investment and governance concerns were (1) protecting their portfolios from further market falls, (2) generating the returns they need, and (3) making decisions in an uncertain environment. Given this, our webcast focused on potential actions plan sponsors could take to mitigate these concerns. If you have the time to watch the full replay, we encourage you to do so. Otherwise, here’s a brief recap of potential actions to consider.

  1. Help make your portfolio more resilient. No one can predict whether the shape of recovery will be V, U, W, L or any other letter. But, with diversity, hedging, and dynamism, you can build a portfolio designed to withstand a multitude of market environments. In addition to strengthening risk management, portfolio actions may also provide new return opportunities — for example, in private markets, alternative credit or tail-risk hedging.
  2. Hedge unrewarded risks. Interest rate risk remains the largest source of volatility for many defined benefit plans. Liability hedging can help keep this risk manageable so that you can focus on managing and exploiting other risks with more potential to add value long term. While Treasury yields could rise and credit spreads could fall as the economy recovers, this is far from certain, so we caution against making drastic moves. If you have a strong view on rates, your action may be to refine your hedge ratio targets rather than forego liability hedging outright.
  3. Review return and risk needs. Chances are that the market environment has blown your strategy off course. Many plan sponsors are under financial stress or behind their journey plans, and market and economic risks are elevated. Potential funding relief may provide breathing room in the short term but won’t be a long-term panacea. Going forward, you may need to reconsider the trade-offs — a longer time horizon, taking greater risk or provisioning for more cash going forward — and be more flexible during volatile markets.
  4. Flex governance to expand expertise. There will be more downturns to come with opportunities to help reduce risk. A well-designed portfolio, incorporating alternative hedging approaches, will help you reduce risk without sacrificing expected returns. Prioritize your time by focusing on risk budgets, setting an appropriate hedge and ensuring the portfolio is sufficiently diversified. If you don’t have time for this in addition to day-to-day plan management activities, you might look outside your organization for help on the latter.

Disclaimer

The information included in this presentation is intended for general educational purposes only and does not take into consideration individual circumstances. Such information should not be relied upon without further review with your Willis Towers Watson consultant. The views expressed herein are as of the date given. Material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Willis Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this presentation should not be relied upon for investment or other financial decisions, and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this presentation to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

Willis Towers Watson is not a law, accounting or tax firm and this presentation should not be construed as the provision of legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with their legal counsel and other professional advisors as appropriate to ensure that they are properly advised concerning such matters. In preparing this material we have relied upon data supplied to us by third parties. While reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party.

This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law. In the absence of its express written permission to the contrary, Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on the contents of this document including any opinions expressed herein.

Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson and its affiliates, whether for its own account or on behalf of others, may not necessarily reflect the views expressed herein. Investment decisions should always be made based on an investor’s specific financial needs.

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