Pension Terms, Revisited

By John Iekel • November 20, 2017 • 0 Comments
Language purists generally are at best skeptical about the notion that words and grammar are fluid. But the retirement industry is rife with words and terms whose meaning is expanding or shifting, including terms related to DB plans, at least according to Willis Towers Watson.

In “Defined Benefit Plans: 10 New Definitions for 2018,” Willis Towers Watson argues that “as changes occur in the defined benefit plan landscape, our business language needs to keep up.” If pension-related terms don’t, they warn, the result could be “excessive risk taking and time wasted on short-term issues that have little or no bearing on pension plan success.”

The report lists 10 terms whose definitions it suggests should be revised to better enable plan sponsors, consultants and managers to meet challenges their plans may face:

Delegation: “Enhancing your ability to make strategic decisions and achieve strategic goals by outsourcing their execution to third parties. Delegation aims to improve efficiency of implementation, reduce costs and manage risks within the context of your defined investment strategy and allow you to reallocate resources toward your core business.”

Diversify: “Use a greater variety of return drivers to help enhance return and/or potentially reduce total portfolio risk.”

Fiduciary duty: “Actions taken are subject to a higher level of scrutiny as more parties are considered fiduciaries and are being held to higher standards that require subject matter expertise.”

Full funding: “Having assets that equal or exceed the organization’s desired funding target, which could reflect market cost required to settle obligations, signify the ability to run them off over the very long term, or support future benefits for employees.”

Implementation: “Proactive, timely and transparent portfolio management and execution within cost and risk budgets. This is supported by a deep resource structure, internal or outsourced, that empowers committees to focus on their strategic goals for the pension.”

Interest rate risk: “A liability valuation factor where increases are already priced into the forward curve, meaning potential gains from taking this risk are lower than one might expect. It is often the most significant risk for pension plans, extremely difficult to time and vital to portfolio construction.”

Investment strategy: “The dynamic process of achieving a series of risk allocations that vary with market conditions and reflect the plan’s progress toward its funding and settlement objectives.”

Liability-driven investing: “Making any investment decision that takes the unique profile of the liability into account. This can extend beyond long-duration fixed-income assets as long as the decision was made to manage risk in an asset/liability context.”

Success: “The ability to execute the firm’s objectives, including those related to funded status and risk management, and to ultimately secure benefits for all plan participants (via various combinations of obligation retention and settlement strategies). Oversight and monitoring of the strategy focuses on progress relative to objectives, with less emphasis on short-term investment return goals.”

Time horizon: “A series of time frames that vary in length depending on sponsor objectives, plan liability profile and the desired approach to delivering retirement benefits over the long term (either through the plan or through settlement). In some cases, the time horizon can be very short.”