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As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. This paper examines three levers that can enhance portfolio outcomes in a low-return world. The levers include: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria—its magnitude of impact and the certainty that this impact will be realized. Our analysis indicates that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.
Low-return environment, defined benefit pension plans, active equity management, factors, private equity, hedge funds
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All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2017 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 13 February 2019