The BCG Pension Insider

July 2022 – Volume 129, Edition 1

Pension De-Risking – The Time for Plan Sponsor Action Is Now

A BCG special feature article in collaboration with BofA Global Research

Pension De-Risking - The Time for Plan Sponsor Action is Now In the years since the financial crisis of 2008, defined benefit pension plan risks have become a top priority for U.S. corporate plan sponsors. Following the market crash, plan sponsors diligently worked to reduce balance sheet exposure to pension liabilities through a variety of pension de-risking strategies, including plan redesign (e.g., plan closures or freezes), in-plan strategies such as increased contributions and liability driven investing (“LDI”), and pension risk transfer (“PRT”) strategies such as lump sum offerings and annuity buyouts.

Defined benefit (“DB”) pension funds have always been an important source of demand for the bond markets (i.e., Treasury and Investment Grade Credit markets). With recent increases in Treasury rates and widening of investment grade corporate spreads, many DB plans are now at or near being fully funded1. With the risk of recession on the horizon, and simultaneously falling Treasury rates, the time for plan sponsor action is now. In this article we attempt to quantify what expected de-risking will mean for demand for Treasury and Investment Grade Credit bonds from both long duration/LDI and PRT strategies. This article, a collaboration between BofA Global Research (“BofA”) and BCG Pension Risk Consultants I BCG Penbridge (“BCG”), is designed in three parts:

  • Part I – BCG Analysis: An analysis prepared by BCG that compares BCG’s projected incremental demand for long duration/LDI bonds (“BCG Estimate”)2 to a hypothetical scenario that would result if all U.S. DB pension funds moved to a 100% long duration/LDI bond allocation (“Max Potential Demand”);
  • Part II – Q&A Interviews: Steve Keating, Managing Director at BCG, interviews BofA’s Yuri Seliger (Investment Grade Credit Strategist) and Meghan Swiber (Senior US Rates Strategist) to capture their respective observations of the BCG Estimate and Max Potential Demand analysis, and more importantly why the BCG Estimate is so different from Max Potential Demand. As part of this Q&A, Mr. Seliger and Ms. Swiber will also share their views on where we are in the credit cycle and what the current economic environment suggests for interest rates and credit spreads, important considerations for de-risking activity and pension portfolio construction. Part II also includes BofA questions for BCG to further clarify some of the underlying assumptions used by BCG to establish its estimates; and
  • Part III – Key Takeaways: This last section provides key takeaways to raise awareness of plan sponsors and advisors that there is a window of time right now to de-risk DB plans under optimal conditions and, importantly, to acknowledge (based on BofA’s forecast) that these optimal conditions may not last long.

Read the Full Article Here

This article is suggested reading for institutional investors across the investor spectrum, and a must read for senior corporate finance and pension plan decision makers, as well as their advisors, as they navigate these turbulent times.

1 The average funded ratio for U.S. corporate pension plans reached its highest point in recent months since before the financial crisis, driven by solid equity returns in 2020 and 2021, followed by a spike in interest rates in 2022. This means that many corporate pension plan sponsors could pay lump sums and purchase annuities for all of their plan’s participants (i.e., a plan termination) without needing to contribute much (if any) capital beyond distributing the assets that are already in the plan.

2 The BCG Estimate is subject to many assumptions. Changes in any of these assumptions could yield materially different results and still be considered reasonable.

BCG’s Steve Keating to attend Stanford Graduate School of Business Executive Education Program

BCG’s Steve Keating to attend Stanford Graduate School of Business Executive Education ProgramBCG’s Steve Keating will attend the Stanford Graduate School of Business Executive Program for Growing Companies, which runs from July 31st through August 11th in Palo Alto, CA. According to the School’s overview, the comprehensive, general management program is solely focused on the needs, challenges, and opportunities of growing companies. Participants will learn how to create and execute strategies in order to move faster, operate more efficiently, and expand into new markets. The program will include a focus on management systems that need to be put in place to sustain growth, will provide exposure to leading research happening at Stanford’s world-renowned Center for Entrepreneurial Studies, and will offer a forum for case studies, guest speakers, and peer interactions for participants to share stories of success and failure.

In commenting on his participation, Steve Keating says:

“I am excited to be participating in the Stanford EPGC. My goal for participating in the program is to meet program faculty and participants so that I can learn from their background and experiences, participate in shared learning exercises and explore new frameworks and growth strategies, all while considering what it means to BCG’s business. This will help me and my team at BCG design the optimal strategy for BCG’s’s continued growth and best practices for execution.”


Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)

Retirees (duration of 7) – 4.06%
Term Vesteds (duration of 10) – 4.09%
Actives (duration of 15) – 4.06%

Annuity Purchase Rates as of July 1, 2022