Martin Leibowitz, Managing Director in Equity Research at Morgan Stanley, recently sat down with Antti Ilmanen and Rodney N. Sullivan of AQR to discuss contemporary challenges in pension investing. This is the first in a series of "Words From the Wise" interviews to be published on AQR.com.
Corporations in the U.S. have been shedding defined-benefit (DB) plans and moving toward defined-contribution (DC) plans. The remaining DB plans have been shifting gradually to liability-driven investing (LDI) for a host of reasons, including:
- DB plans grew to be quite large relative to the sponsoring firm’s market value.
- The attraction of reducing contributions by holding equity-oriented portfolios diminished as pension plans’ funded status became more volatile in the early 2000s.
- Changing accounting regulations increased the magnitude and visibility of the sponsoring firm’s balance sheet volatility.
We explore “What’s next for DB plans?” and the conditions in which increasing or decreasing risk makes the most sense, with provocative insights.
We then turn to assessing the observed greater risk-taking by U.S. public pension plans, taking in some lessons from pension models implemented abroad, and asking how best to support a more secure retirement for individual investors.
We conclude with Marty’s thoughts on his research on asset allocation, duration targeting and equity valuations.
A fascinating discussion about how Marty came to Wall Street, what he discovered when he arrived there, as well as an exploration of his heroes is included in a special section.
Finally, for readers not well versed with the challenges of U.S. DB plans, Appendix A provides some terminology and key concepts as background for the discussion in the next few pages.