Asset Liability Portfolio Design for Defined Benefit Plan


Challenge:

A large Atlanta-based client hired Blue Prairie Group to create an investment portfolio for an underfunded DB plan that would minimize investment volatility yet still allow for investment growth. By doing so, the defined benefit pension plan would be able to avoid large swings in pension funding status and as a result, the client would avoid significant cash contributions to the DB plan.

Results:

  1. BPG educated the Client on the Liability-Driven Investment (“LDI”) strategy.
  2. Working with the Plan’s actuary, Blue Prairie Group determined the “term structure” of the liabilities. Blue Prairie Group then selected investment managers that were appropriate to each segment of the liability curve based on duration and credit.
  3. BPG implemented a plan that phased in the LDI bond structure into the overall portfolio, growing the LDI component over time through periodic rebalancing and deployment of new cash flows.
  4.  BPG worked closely with the recordkeeper to obtain the lowest overall cost investment solution for the Client.

Background:

BPG was retained by the Client in August 2010 for both its defined benefit and defined contribution plans. For the defined contribution plan, the focus was on fee reduction and restructuring the investment portfolio (i.e. eliminating redundancies, ensuring critical asset class exposure and creating a custom investment policy statement).

For the defined benefit plan, the Client was looking for a way to minimize cash contributions into the plan without incurring unnecessary investment volatility. Prior to BPG’s involvement, the Client had never looked at liability-driven investing (i.e. creating an investment portfolio that moves in tandem with the increase and decrease in the plan’s liabilities based on changes in the broader interest rate marketplace).