Human Capital & Careers

Big Pensions Slash Stock Investments

Instead of just seeking high returns, corporate plan sponsors are now trying to match returns to liabilities, a study finds.
David KatzApril 18, 2008

Instead of trying to gobble up big gains on the stock market, increasing numbers of the corporate sponsors of traditional pension plans are adopting a lower-risk strategy of only going for returns that match the plans’ liabilities, according to a recently released study of pension funding.

For years, companies have taken their cue from bull markets and tried to parlay the assets held in their defined-benefit pension plans into big market gains. Now, however, some are resetting their investment targets to “market-based liabilities,” says pension-investment consultant Paul Morgan, “not an expected return of 8 percent” or thereabouts.

After years of warnings from more conservative pension experts, employers are starting to change to a more bond-based strategy, says a study by Milliman, the pension actuarial firm. Indeed, the percentage of pension-plan assets invested in stocks dropped from 60 percent to 55 percent during 2007, representing a shift of almost $60 billion worth of plan assets from equities into fixed-income and other investments, according to the firm’s study of the 100 U.S. public companies with the biggest defined-benefit pension assets whose 2007 annual report was released by March 15, 2008.

Further, the pension plans’ fixed-income assets rose by 3 percent, to 33 percent, last year, representing a gain of more than $40 billion. The remaining assets were invested in “other” asset classes, including real estate, private equity, hedge funds, and cash equivalents, according to the study.

The big changeover from equity to fixed income represents a shift in thinking among a fair chunk of big corporations to a liability-driven investment attack for their pension plans, which seeks to curb the future volatility of their funded status, according to Milliman consultants. Part of their motivation may be the Financial Accounting Standards Board’s requirement, begun last year under FAS No. 158 (Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans), which requires plan sponsors to put the pensions’ funded status — assets minus liabilities — on the sponsors’ balance sheet.

Also fueling last year’s move to asset-liability matching may be the Pension Protection Act of 2006, which cut the number of years over which pensions can “smooth” their results, Milliman consultants say.

The study found that 31 of the 100 companies dropped their equity allocations by more than 5 percent in 2007 — a jump from 11 companies in 2006. Eleven of the plan sponsors cut their pension investments in shares by more than 10 percent last year. For example, General Motors reduced its stock allocation from 40 percent in 2006 to 30 percent in 2007; IBM cut back from 63 percent to 52 percent; and Ford cut a huge swath of its stock allocations, from 70 percent to 53 percent.

The changes have legs, the advisers believe. “These are not tactical shifts,” Morgan, the director of capital markets and modeling for Evaluation Associates, a company owned by Milliman, said at a Wednesday briefing on the survey findings. “We believe that these trends are permanent.” In an interview with, he said that if the changes were short term and not strategic, the companies would have hedged their risks with derivatives rather than making such major shifts in their asset allocations.

In contrast to the trend among big corporate defined-benefit plan sponsors, the Pension Benefit Guaranty Corp., the nation’s pension insurer, announced in February that it was making a big shift from bonds to stocks. “PBGC is moving in an opposite direction, but toward the same point” that corporate plan sponsors are, says John Ehrhardt, a Milliman consulting actuary, who explains that the pension insurer’s equities allocation had been extremely low for years.