Deciding to offer and fund defined benefit (DB) plans can come with some important caveats. Any fiduciary of such a plan must counter unusual market activity seen in 2022 and into 2023, while also reducing risk the organization faces from the plan.

Investment strategies, however, have shifted in light of the heightened interest rate environment seen in the US and higher inflation across the globe.

Many plan owners understand this fact and have begun to implement more complex investment strategies to protect the assets side of the ledger. For instance, in a survey of financial executives conducted by CFO Dive and Mercer, 88% stated that they use a multi-year strategy when planning the investment tactics. Another 83% stated that they manage the plan in an integrated asset and liability framework, while 89% said they use or are considering using funded status and/or interest rate triggers to de-risk their portfolios.

With the changing market activity, it’s important to take complex strategies and incorporate them to protect assets in the portfolio. Here’s how organizations are doing so, based on the results of the recent survey.

Diversifying from public equities

What organizations want to achieve in their asset pool will determine the strategies that they ultimately take within their public equity investments.

According to the survey, many financial leaders sought to improve the expected financial outcomes through the diversification process. This led to 23% to diversify the return-seeking portfolio while 24% increased their allocation to private assets.

Tactics used over the past two years vary significantly. But some trends become clear, based on Mercer data. Among investment related changes that have been implemented in the past two years, 46.1% increased interest rate hedge ratio, 42.8% increased the use of interest rate derivatives, and 40.1% increased fixed income.

For plan sponsors, this increased complexity requires a greater ability to manage the portfolio, while reviewing more asset classes and managing different types of risk.

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