Corporate US pension funds are more advanced than their public fund counterparts in using dynamic asset allocation to effect in managing asset liability matching, says Russell Ivinjack, principal at Hewitt EnnisKnupp.
Dynamic asset allocation is the number one trend in the US at the moment, particularly among corporates, observes Russ Ivinjack, principal at Hewitt EnnisKnupp and one of the firm’s primary consultants.
“But it is not a view on what the markets are doing but more what their individual circumstances are and what they should be investing in,” he says.
One client has developed the concept to the point that it is connecting the funding levels to the level of investment in risky assets, a trend Ivinjack applauds.
“It is more formulaic, more explicit,” he says.
“Some corporate clients want a predetermined contribution amount and so they are moving their investment allocations from say 60:40 split between growth and liability hedging assets to a 50:50 position when they reach 100 per cent funding.”
Overfunded funds can decrease their allocations even more, he says, to say 40:60.
But this is not a trend that Hewitt EnnisKnupp sees happening, yet, on the public side.
“Asset liability studies are less explicit than on the corporate side, but a number of funds are decreasing assumed return,” he says.
The Hewitt EnnisKnupp house view, generally is fairly conservative, and consistent with this the consultant’s outlook for the equity risk premium is 2 to 3 per cent, which is fairly modest.
Similarly it believes liquidity risk should be given more attention, and with some funds requiring between 5 and 12 per cent annually to meet pension requirements there is an increasing need for high-quality liquid assets.
“It goes back to using liabilities, how mature or young a plan may be, the outflow and how quickly it’s increasing. There is an increasing need for high-quality liquid assets, sovereign debt, high-quality corporate debt, government-backed mortgages.”
In helping funds manage their assets together with their liabilities, Ivinjack says risk management tools will be increasingly important.
The consultant advocates a new framework on an asset liability basis, looking at the performance of assets and liabilities.
“We are breaking that out, changes in actuarial assumptions, it’s almost about looking at the world in terms of hedging assets such as fixed income, and growth assets. Looking at the purpose of the investment.”
EnnisKnupp, recently bought by Hewitt Associates, which in turn has merged with Aon, is undergoing much change from its boutique startup.
As clients look at the world more globally, and with an asset liability matching focus, the firm believes it is well-positioned to offer appropriate services.
One of the big projects it will have to undergo in its new guise is to manage the research, performance reporting and risk management databases and evaluate which ones are best of breed.
Ivinjack says the consultant’s role has changed from a provider of data and analysis, for example in manager selection, to a focus on total portfolio risk and implementation.
“We’ve become more of a true adviser but clients expected more and better resources in all elements of the business such as trading and we are now employing people from the money management side. Consulting has moved from screening databases and the four Ps to having staff made up of practitioners.”
