Tag Archives: Tamara Burden

Changing public pension investment landscape

The global financial crisis shrunk the funding status of many public pensions. Some sponsors are beginning to cut their expected rate of return, and change the way they invest and handle portfolio risk. In this Reuters article, Milliman consultant Tamara Burden provides perspective on how sponsors can better manage their pension investment risk.

The growing recognition that short-term volatility can have a devastating impact on mature pension plans in the $4 trillion sector could herald a sea change in the way public funds invest in the future.

“There is this shift to recognizing risk is a relevant piece of the discussion, it’s not just about how you get the highest returns over a long period of time but that short-term fluctuations in asset levels can be incredibly detrimental,” said Tamara Burden, an actuary at consulting firm Milliman….

Burden is seeking to persuade public pension managers to use Milliman’s risk management strategy to reduce equity exposure in portfolios by shorting stock index futures. This means they don’t have to sell their fund’s equity holdings.

The strategy is being applied to about $70 billion in portfolios with variable annuities, retail mutual funds and collective investment trusts used by 401(k) plans, but so far not in the public pension sector.

Interest, Burden says, has increased this year with about 15 public pension administrators considering a shift versus five during the same period last year.

Milliman Managed Risk Strategy

A new video showcases how pension plans can protect themselves from downside losses by incorporating the breed of risk management that saved insurers $40 billion during the 2008 economic crisis.

The Milliman Managed Risk Strategy™ aims to stabilize the volatility of an investment portfolio during periods of significant and sustained market decline. Investors now have access to the same risk management techniques Milliman provides to major global financial institutions around the world—techniques that currently help protect more than $500 billion in assets.

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Advances in managing pension asset volatility

A profound shift is taking place in the way pension plan fiduciaries manage market risk and help participants save for retirement. It is being driven by strategies that go beyond asset allocation and seek to actively account for changing market conditions, striving to protect growth in bull markets and defend against losses during major downturns. For more on this new approach, see the new article in the latest issue of Insight.

The most important retirement stories of 2011

If you’re like a lot of people, you’re probably anxious to put 2011 in the rearview mirror. Yet the biggest stories of 2011 could play out for years to come. So let’s take a look in that rearview mirror and see if there’s anything we can learn from some of the key stories we tracked on Retirement Town Hall in 2011.

A record nobody wants to break
In the third quarter of 2011 the Milliman Pension Funding Index had its second-worst quarter in the history of the study (read the full story). Like a consecutive losses streak, nobody wants to break any records for worst quarter in the study.

How will underfunded pensions start to dig out in 2012? “With interest rates remaining at historic lows and low expectations for investment gains, plan sponsors will be facing record levels of contribution requirements in 2012 and 2013,” says John Ehrhardt.

Risky business
The Department of Labor (DoL) gathered experts to discuss the trend towards using investments with higher rewards but higher risks in pension plans (read the full story). Investing is all about risk and reward but pension plan managers face unique circumstances when investing people’s retirement money. That’s why many are exploring new approaches to managing this risk.

“The risk management techniques used by variable annuity providers saved insurance companies $40 billion during the financial crisis,” says Tamara Burden. “Pension plans can benefit from similar techniques, especially in this time of record-low interest rates.”

No more Social Security blanket
Changes are afoot at the Social Security Administration (SSA). In 2011 the SSA announced its plan to stop issuing paper checks (read the full story) and statements (read the full story). These moves are certainly eco-friendly, but they are really intended to help the SSA’s bottom line.

What effect will these changes have going forward? “As the world becomes more reliant on technology, electronic deliverables like these make more sense from both a practicality and cost standpoint,” says Tim Connor. “Get used to it, embrace it, and take part in it.”

Downgrades, they’re not just for hurricanes
The day some thought would never come came in 2011. The S&P’s downgrade of the United States was a dramatic event within the investing world that affected nearly everyone (read the full story). The downgrade led to immediate volatility, at the time.

What will be the lasting effects of the downgrade on those who manage retirement plans? “As humans we tend to forget, most of the initial effects of the downgrade have subsided, investors are still buying U.S. debt,” says Jeff Marzinsky. “However this should not lead investors to a false sense of security. The U.S. economy is improving, but still fragile, markets are volatile, and interest rates continue to remain low.  Investment policy and diversification are key areas to keep a close eye on, more than ever.”

As exciting as watching paint dry
It’s more of a non-story than a story, but 2011 was something of a regulatory vacuum in which employers operating both defined contribution (DC) and defined benefit (DB) plans waited and waited and waited for regulatory guidance on key issues…and are still waiting.

“There are numerous examples where some regulatory guidance would be quite welcome for plan sponsors,” says Charles Clark. “There are holes in the DB funding rules, many questions still swirling around disclosure rules, and new uncertainty around cash balance plan regulations, just to name a few.”

A new approach to pension risk

Pension funds—public and corporate—are suffering from volatility, both in funded status and annual expense, much of which is driven by the volatility of the assets they hold. For the past 10 or 20 years, the concept of risk management for pension funds has been focused on diversification. But diversification doesn’t work when everything falls at the same time.

The variable annuity industry provides an alternative model. Starting in the early 2000s, life insurance companies began using sophisticated risk management techniques in order to offset the liability of the guarantees that they promised their policyholders. These hedging programs were 93% effective during the financial crisis, and saved the insurance industry $40 billion.

How do we translate what the variable-annuity writers are doing into the pension plan space? Doing so involves two sophisticated risk management techniques: volatility management and a capital protection strategy.

For more, read the recent article published by the Bond Buyer.

DOL testimony on living benefits, DC plans

Last week, Milliman principals Tamara Burden and Noel Abkemeieir both testified separately to the U.S. Department of Labor (DOL). The hearing focused on the role of lifetime income options in defined contribution plans. Investment News has the story (registration required):

Insurers and other retirement advocates are pushing for the government to consider annuities safe-harbor investments, which would limit or eliminate the liability of plan sponsors and advisers when recommending such options.

“Safe harbor should be expanded to facilitate plan sponsors in providing a broad range of options,” said Noel Abkemeier, a consulting actuary with Milliman Inc. who appeared today before a panel of Labor and Treasury officials on the behalf of the American Academy of Actuaries. “But it should also be extended to other lifetime-income options, aside from annuities, in order to preserve choice.”

Tamara’s testimony is available here.

Noel’s testimony is available here.