April 24, 2014 / 8:37 PM / 5 years ago

U.S. corporate pensions bet on bonds even as prices seen falling

NEW YORK (Reuters) - Major U.S. companies including Clorox and Kraft are favoring more bonds in the mix for their employees’ defined benefit pension plans, even amid signs the three-decade bull run in bonds is on its last legs.

The $2.5 trillion U.S. corporate pension market enjoyed a robust recovery in 2013, paced by stocks, as the Standard & Poor’s 500 Index rose the most since 1997. That helped pension funds close a funding hole that opened after the global credit crisis of 2008, so that the average corporate pension was funded at about 95 percent at the end of 2013, compared with 75 percent at the end of 2012, Mercer Investments data show.

Now that they’re more confident that they have the money to meet their pension obligations, corporate pension managers are pulling back from the perceived risk of the stock market and buying U.S. government and corporate bonds, even though many expect bond prices to fall in coming years.

“Even if interest rates rise more than the market predicts, you do get the income component that offsets the price loss of those bonds,” said Gary Veerman, managing director of U.S. Client Solutions Group at BlackRock in New York, which has $4.4 trillion under management, of which two-thirds are retirement-related assets. Veerman’s group advises corporate treasurers how to manage their pensions.

The allocation to bonds by the top 100 publicly-listed U.S. companies in their defined benefit pension plans increased to a median of 39.6 percent in 2013 from 35.9 percent in 2010. Stock allocation in the plans fell to 40.9 percent in 2013 from 44.6 percent in 2010, according to global consulting firm Milliman.

“Now they’re in a position to say: ‘I don’t need all those equities because my funding status is in the mid- to low-90s,’” said Dan Tremblay, director of institutional fixed-income solutions at Fidelity unit Pyramis in Merrimack, New Hampshire, which manages more than $200 billion.

Because many defined benefit plans are closed to new workers, managers are more concerned with having a steady stream of income every year to meet their annual payout than generating an above average market return or even meet the historical 6% - 8% returns on equities. Retirement plans offered to new workers are mainly 401(k) plans in which the worker is responsible for making investment allocation decisions.

Federal Reserve data show private pensions began reducing risk in the second half of 2013, shedding $11.3 billion in stocks and loading up on more than $100 billion in Treasuries, agency debt and corporate bonds. Tremblay believes this trend could last for a decade.


The collective pension deficit for 1,500 U.S. companies fell to $103 billion at the end of 2013, down from a record of $689 billion in July 2012, based on data from consulting firm Mercer.

By shifting to bonds, pension funds help preserve their funding levels even if stocks plunge. The move is a product of increased reliance on liability-driven investing (LDI), which focuses on matching investments with liability needs rather than beating an index.

“It makes sense to de-risk it,” said Andy Catalan, managing director and head of liability-driven investing strategies at Standish Mellon Asset Management in Boston. “Get out of risky assets, get into fixed income, have the assets and liabilities move in tandem, effectively removing that volatility.”

Standish relies on LDI strategies for more than $13 billion of the more than $160 billion in bond assets it manages for clients.

By the end of last year, 19 U.S. companies of the 100 Milliman studied had bond allocations of 50 percent and higher, compared with 10 in 2010. TRW Automotive Holdings Corp TRW.N, which has a $7 billion pension plan, had the highest at 73.5 percent.

One LDI strategy involves exiting assets such as equities and buying long-dated bonds, even if the market environment makes this seem counterintuitive. For Clorox Corp (CLX.N), embracing LDI amid signs rates may rise wasn’t easy.

“We did this over time,” said Chip Conradi, treasurer at Clorox in Oakland, California, at a webcast in March. “Ultimately, it got to a point where the Clorox pension committee was comfortable with it. They accepted the notion of a glide path ... which would take emotion out of the decision.”

Kraft Foods Group Inc. KRFT.O said in an e-mailed statement to Reuters it is aiming for 80 percent bond exposure in its $7 billion pension plan, up from 43 percent in late 2013, to be phased in over the next several years. The strategy is to first fill the fund with enough money to meet future obligations, and then try to make sure another big hole doesn’t open up as a result of a tumble by equities.


Loading up on bonds is not without risks. It has been a growing view that bonds might already be at the start of a prolonged slump after a 30-year run of steady returns, marked by record low yields set in 2012.

While stocks soared last year, the Barclays U.S. Aggregate Bond Index lost 2 percent, the third-worst year in four decades. Historically, though, bonds have stood out even when the Federal Reserve raises short-term rates. From 2004 to 2006, when the central bank lifted rates by 4 percentage points, bonds produced an average return of 3.7 percent, according to Barclays.

So far in 2014, the Barclays index is up 1.71 percent. Even if rates rise, treasurers can still see a benefit as long as the higher-yielding bonds the plans own produce more income than what is lost from the drop in price.

“It’s an opportunistic time for plans to be moving down the de-risking glide path,” said BlackRock’s Veerman. “You are taking the largest risk in your portfolio off the table.”

Reporting by Richard Leong and Gertrude Chavez-Dreyfuss. Editing by David Gaffen and John Pickering; Graphics by Stephen Culp

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