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Smart technology can help manage asset-liability risks faced by overfunded U.S. Pension Plans

Smart technology can help manage asset-liability risks faced by overfunded U.S. Pension Plans

With U.S. funding levels reaching their pre-financial crash highs, Simon Robinson from Moody’s Analytics explains why pension plans must deploy technology to tackle asset-liability management risks. 

The U.S. defined benefit pensions industry has demonstrated a dramatic improvement in funding status in recent times. According to BlackRock’s U.S. Pension Funding Update, 2021 corporate pension plans have had an incredible year, with funded ratios up 11.1% as of December 31, 2021.  The average plan is now 99.3% funded on a PBO basis and this is the highest level since the 2008/09 financial crisis. 

Reports like this one are putting the spotlight on Liability Driven Investment (LDI) strategies and de-risking options. Many corporate pension plans are implementing de-risking or are at the very least in the process of developing them. The key question now is how asset-liability risk analytics data can help with implementing an optimal strategy that achieves specific risk management objectives? 

Technology can certainly be valuable to pension plans looking to transition from growth assets to more liability-matching assets such as corporate bonds, US treasuries and private illiquid credit assets. The challenge is that numerous pension funds have legacy technology systems that are simply not built for today’s more sophisticated strategies, whether that’s managing de-risking glidepaths or some form of asset-liability modelling. With this legacy issue front of mind, what steps can pension plans take to ensure their existing systems become more efficient and effective?  

There is technology that can help pension plans understand where to deploy incremental assets most effectively into a portfolio, to enhance asset-liability matching characteristics. However, this technology needs to be in real-time for fiduciaries to react more quickly. Such technology should also assist when it comes to communicating useful information effectively for pension committees and board members to be able to make decisions as quickly as possible. Reporting is also an important component of this de-risking framework and any technology that is deployed should be able to deliver an efficient platform from a reporting perspective.  

Our PFaroe DB platform provides monitoring of assets, liability and risk analysis on one screen, to ensure pension plans have the right information at the right time to make the best possible investment decisions. 

As plan sponsors continue to deliberate over highly complex decisions around their portfolios, having real-time performance and monitoring information is an imperative. The right technology can certainly help pension plans understand where risks exist. Crucially, these assets can then be deployed in a highly efficient manner to address specific gaps – whether for a pension risk transfer solution or maintaining assets and liabilities on its own balance sheet.  

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