Frustrated by the volatility of its contributions to its U.S. defined-benefit pension plan, Thomson Reuters adopted liability-driven investing, moving far more of its assets into fixed-income securities so the performance of the plan's assets would more closely match that of its liabilities.
Over a three-year period starting in 2006, the financial information provider flipped from having 70% of the plan's assets invested in equities and 30% in fixed income, to having 70% in fixed income and 30% in equities and other risk assets.
"We said we were prepared to trade return for less volatility," says Andrew Perrin, vice president of treasury and global head of pensions and investments.
The company kicked off the effort in 2006 with a strategic review that used Monte Carlo simulations to assess how the pension plan would perform in 500 economic scenarios. That review concluded that a fixed-income allocation of 60% to 70% would be optimal.
Thomson started by moving 10% of the plan's assets from stocks to bonds in June 2006. It switched another 10% from stocks to bonds in May 2007 and, another 10% in December 2007. In early 2008, it diversified its equity holdings, added commodities, and moved 10% of its assets from long-term bonds into Treasury Strips. Early in 2009, it switched $600 million from government bonds to high-grade corporate bonds.
"We had ongoing approval to execute, and to do so opportunistically," Perrin says.
At the end of 2009, the Thomson Reuters plan, which was closed to new entrants in 2006, had $1.36 billion in assets, $1.39 billion in liabilities and a funded status of 97%.
"If we hadn't gone forward on these strategies, our funded status would now be quite different," says David Shaw, the company's treasurer, noting that Thomson Reuters hasn't made a "meaningful" contribution to the plan since 2003. "Our back-testing has said that these strategies have preserved assets of over $400 million."
He waves off any concern about being so heavily invested in fixed income given the current talk that the bond market may be experiencing a bubble. "We're hedged," Shaw says. "If [fixed-income] assets blow up and our asset values go down, so do our liabilities."