PLANSPONSOR - June/July 2021 - 9

For DB Plans, Inflation Has an Upside
INFLATION can hurt a defined benefit
(DB) plan's finances, but the latest bout of
it has, for plan sponsors at least, seemed
mostly favorable, industry experts say.
For inactive participants-or for all
participants in frozen plans-DB liabilities
are fixed-dollar liabilities, so if inflation
is high, the " real " value of their future
pension payments declines, notes Brian
Donohue, a partner at October Three
Consulting. This correlation lessens the
purchasing power of the benefits that
participants eventually receive, but it
lowers the plan sponsor's liability cost.
" Everyone thinks inflation is bad, but
part of the pain sponsors have suffered
is because inflation has been lower than
expected, " Donohue explains. " They made
TIDBIT
CITs Pull in More Net Contributions
IN MORNINGSTAR'S 2020 annual
review of net inflows, the BlackRock
LifePath Index series continued to gather
more assets in its collective investment
trusts (CITs) than in mutual funds,
reflecting the company's connections with
large institutional plans. In recent years,
CITs steadily increased their market share
due to lower fees and generally lower costs
compared with mutual funds. BlackRock
Top 5 Target-Date Fund Series, by Net Inflows
■ Mutual funds ■ CITS
BlackRock
LifePath Index
Fidelity Freedom
Index
Vanguard Target
Retirement
American Funds
Target Date Retirement
JPMorgan
SmartRetirement Blend
$4.4b
Source: Morningstar Direct (data as of December 31, 2020)
$2.7b
$13.5b
$9.6b
$2.5b
$5.2b
$15.6b
$4.2b
$16.8b
$16.6b
LifePath collected almost $22 billion in its
mutual funds and CITs last year, edging
past Fidelity Freedom Index and Vanguard
Target Retirement. Vanguard had had the
largest inflows since 2008. -PS
benefit promises, thinking that inflation
would be higher, but, as it was not, it's been
more expensive to cover those promises. "
On the DB-plan asset side, higher
inflation means higher interest rates, which
lowers the return for fixed-income investments,
says Kevin McLaughlin, head of
liability risk management, North America,
at Insight Investment. But corporate DB
plans use fixed-income investments to
match liabilities, so inflation will lower
fixed-income assets' value as well as the
liabilities. For this reason, inflation would
not change the long-duration fixed-income
investments held in corporate DB plans.
" One way to think about hedging
liabilities is that, if your only goal is to stabilize
pension finances and you're invested
in duration-matching bonds, if inflation
is sustained, the value of the bonds will go
down and the value of liabilities will go
down correspondingly. "
The impact of inflation is less clear
for equity investments than for bonds or
fixed-income investments, Donohue says.
He says DB sponsors should trust their
investment managers to watch the market
and adjust equity investments accordingly.
McLaughlin says he believes the
economy is encountering a more benign
scenario now. If there was a long run of
inflation, equity prices would be higher
in general, but, in Insight Investment's
view, he says, the inflation happening
now is a temporary fluctuation caused by
transitory changes. -Rebecca Moore
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