Manning & Napier Advisors, LLC

Defined Benefit Pension Plan Investing:
Time for a Solution that Works
June 2011

Approved CAG-CIT PUB015-R (10/11)

Introduction
The beginning of the 21st century has been perhaps the most trying environment ever for defined benefit pension plan sponsors. This is perhaps best evidenced by the decline in the number of single-employer defined benefit plans covered by the Pension Benefit Guaranty Corporation (“PBGC”), which has gone from 53,589 in 1995 to
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27,647 in 2009 . Clearly, two of the worst bear markets in U.S. history and a generally low interest rate environment have greatly contributed to today’s pension crisis. However, the investment strategies employed by many pension plans over this period have failed to recognize the intertwined relationship between plan assets and plan liabilities. Likewise, many investment strategies have lacked the flexibility needed to meet plan goals across a wide range of market environments.
Understanding the Investment Needs of Defined Benefit Pension Plans
An important first step in developing an investment strategy for any pension plan should be to understand the nature of the plan’s liabilities, which also means recognizing that the asset/liability relationship exists. Too often, the investment industry talks about pension plans as if they are one homogeneous type of investor, when, in fact, each plan has its own unique characteristics and needs. Clearly, a well-funded, young plan with positive net cash flow and a growing actuarial liability should have investment and risk management priorities different from a more mature plan with negative net cash flow and a declining liability. While the actuary is the expert on liabilities and should be relied upon for estimates of overall funding status, it is important that the investment management strategy continually