Q&A: An analyst’s eye view of the risks ahead for plan sponsors

Dane Mott has focused on pensions through much of his career, which has spanned the tech bubble and the global financial crisis – two periods when defined benefit issues were front and center for investors. Dane, an accounting analyst at Capital Group, recently sat down with Gary Veerman, Head of LDI Solutions at Capital Group, to discuss plans’ outsized underfunding, aggressive asset allocations, the state of pension disclosures and why it may make sense for plan sponsors to embrace liability-driven investing, even in an era of low interest rates.

Here are some highlights from Dane’s comments, with a link to the full interview.

 

On dividends and stock buybacks vs. pension contributions:

Dane Mott: Many companies’ dividends and stock buybacks have exceeded their free cash flow, and they’ve borrowed at low rates to make up the difference. At the same time, their contributions to pension plans have been anemic. The consequence is that the average pension plan was about 14% underfunded at the end of 2019 despite the longest bull market in history. Now that we’re formally experiencing a recession, plans hope that any market rebound can be sustained through the end of their next fiscal years in order to help them avoid worsening their funding gaps.

 

On navigating coronavirus-triggered market volatility:

Dane Mott: The COVID-19 experience reminds me of other periods of market turmoil like the tech bubble and the global financial crisis. Equities have a history of producing higher returns relative to other asset classes over the long term, but equity holders take on more risk and those risks come to the forefront in times of uncertainty. Now, global markets are absorbing a lot of new information and navigating a lot of uncertainty with COVID-19, and the implications of that new information are absorbed directly into equity prices.

 

On plan sponsors adopting an LDI strategy:

Dane Mott: Strategies like LDI are intended to provide some level of protection in periods of market volatility like we find ourselves in with COVID-19. With LDI, ideally the plan assets and plan obligations have fairly equal and offsetting responses to changes to interest rates. In other words, investors with LDI positions in their pension plan assets should be more agnostic about changes in interest rates than investors with more exposure to other asset classes.