Companies seek to diversify retirement investments as funding levels soar

In recent years, companies have invested a greater proportion of their plans in fixed income securities, which are considered safer values ​​than assets such as stocks, commodities, private equity and capital. ‘real estate. S&P 1500 companies invested 51% of their plan funds in fixed income in 2021, up from 50% a year earlier and 42% a decade earlier, according to advisory firm Mercer LLC.

This, combined with stock market volatility, led to lower investment returns. The 100 largest U.S. pension plans generated average returns of 8.3% in 2021, compared to 14.6% in 2020 and 19.5% in 2019, consultancy Willis Towers Watson PLC said. Fixed income securities such as US Treasuries and high quality corporate bonds generally offer little yield.

Today, a small but growing number of companies are considering adding higher-quality private debt to their fixed-income portfolios, which offers some kind of middle ground, pension advisers said. Others, however, stick to traditional fixed income investments.

“As companies look to continue to profit from their programs, they are looking to pull every possible lever,” said John Delaney, senior director and portfolio manager at Willis Towers Watson.

Investment grade private credit instruments are bonds that corporations and other entities issue to investors outside of public markets. They offer a higher yield than some other fixed-income securities, but are generally less volatile than stocks, Delaney said.

Motorola Solutions Inc. is one of the companies exploring this path. The Chicago-based communications equipment provider plans to invest approximately $100 million in investment-grade private loans over the next two to three years, in addition to the $50 million it has deployed since 2019, said Chief Financial Officer Jason Winkler. The company plans to include private credit to help boost its returns and diversify its portfolio, Winkler said.

“We’ll continue to look for opportunities there, but our path to $150 million is the current allocation we’re comfortable with,” Winkler said. Motorola said its US pension plan was 81% funded at the end of 2021, up. 78% a year earlier.

Motorola’s retirement assets in the United States totaled $4.08 billion in 2021, up 13.4% from a year earlier, according to a regulatory filing.

The company said it had allocated 58% of its plan’s investments to fixed-income securities – mostly corporate bonds – by the end of 2021, similar to the previous year. Motorola’s returns on private credit last year exceeded those on its public fixed-income assets, Winkler said.

Sponsors of defined-benefit pension plans, which promise fixed payouts to retirees, increased their investments in private placements by 25% in 2021 from a year earlier, according to client data from the investment arm of Voya Financial Inc., which manages $268 billion in assets. The company declined to provide the monetary value of these investments.

“Private placement ticks all the boxes for this return,” said Oleg Gershkovich, pension liability strategist at Voya. The investment grade government bond market issued about $1.7 trillion last year, while the private placement market issues about $100 billion a year, according to analysis by Voya.

The expected return on investment-grade private credit is about 0.50 to 1% higher than on public credit instruments, said Matt McDaniel, partner at Mercer.

But the market is less liquid than its public credit counterpart, which means it can be more expensive to invest, McDaniel said. Indeed, private credit investors need to do more due diligence and negotiate transaction-specific credit protections.

“The two main benefits are slightly higher yield and increased portfolio diversity,” said Russ Ivinjack, chief investment officer at professional services firm Aon PLC, referring to private credit.

Funding levels for company pension plans have soared since the early days of the coronavirus pandemic in 2020, when they fell from the year-ago period. Defined-benefit plans had an overall funded status of 100% at the end of March, up 5 percentage points from a year earlier, Mercer’s review of S&P 1500 companies showed. This is the highest since May 2008.

Yields on long-term corporate bonds, also known as discount rates in the retirement world, are expected to climb this year as the Federal Reserve continues to raise interest rates. This would further increase funding levels. Higher interest rates mean companies have to set aside less capital to fully fund their obligations, as the present value of future pension payments declines. Better funding will likely lead companies to make more fixed-income investments, advisers said.

Duke Energy Corp. will consider moving more assets into its fixed-income portfolio as its plan’s funding level increases, a spokeswoman said. The Charlotte, North Carolina-based utility said its pension plan had a 60% allocation to fixed-income assets at the end of 2021, up from 55% a year earlier. The utility does not use higher quality private credit, the spokeswoman said.

Duke, whose plan was 112% funded at the end of last year, invests in high-quality corporate and Treasury bonds to offset fluctuations in the size of its liabilities, the spokeswoman said.

Aluminum producer Alcoa Corp. would invest in more fixed-income assets if the funded status of its U.S. plan, which already exceeds 100%, were to continue to grow, Chief Financial Officer William Oplinger said. The Pittsburgh-based company said last year it allocated 58.7% of its investments to fixed-income securities, up from 43.7% a year earlier.

“We invest in a wide variety of medium- and long-term U.S. government and high-quality corporate credit instruments in our liability hedging portfolio,” Mr. Oplinger said, adding that the company does not invest money. money in high quality private credit instruments. .

This story was published from a news agency feed with no text edits

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