| | December 20208CIOReviewIN MY OPINIONIn recent years, following the trend of transitioning from Defined Benefit (DB) to Defined Contribution (DC) plans, many US corporate pension plans have closed to new entrants. Even though remaining benefit payments may stretch for decades, these plans are on a path to irrelevance and have entered their "End-State."End-state portfolios typically have a heavy and increasing percentage of retirees and the liabilities are (or, soon will be) in "run-off" mode. As end-state corporate pension plans have become more prevalent, their special portfolio management challenges have gained attention and call for new asset allocation analytics. CIOs with well-funded end-state plans (e.g., 85% and above) are less concerned about their ability to make benefit payments in the next 5-10 years than keeping the plan's funded status stable. Also, many CIOs have enjoyed good performance from illiquid private assets (private equity, credit and real estate) and may wish to keep them. CIOs face a choice: Should they immunize with fixed income assets? or, should they hold an allocation to return-seeking assets to protect against longevity and other risks? If the latter, what is the optimal mix of public and private assets? To answer this last question, we argue for new portfolio allocation analytics that explicitly incorporate the unique characteristics of private assets such as their illiquidity and uncertainty of capital calls. These analytics establish a ASSET ALLOCATION ANALYTICS FOR END-STATE CORPORATE PENSION PLANSBy Michelle (Yu) Teng, PhD, CFA, Vice President, with contribution from Junying Shen, Senior Associate, PGIM linkage between private and public markets using estimated PMEs which measure the performance of a private asset relative to public markets. The analytics also give CIOs the opportunity to express their own views on expected private asset performance relative to public markets and their fund-selection skill, which is an important driver of private asset performance. The goal is to help CIOs identify the optimal allocation to private assets, as well as the mix within both the public and private portfolios, to achieve a desired level of funded status stability.An optimal asset allocation solution will maximize the end-state portfolio's expected horizon value while meeting future cash obligations at a very high confidence level (i.e., 99% and above) and keeping funded status sufficiently stable over the investment horizon. Funded status stability may be represented by a maximum funding ratio variability threshold, which is the average year-over-year (absolute value)percentage change in a plan's funding ratio over the investment horizon. Intuitively, a lower variability threshold represents a stricter CIO constraint.
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