Redirection Confirmation

You'll be re-directed to the Institutional Investor site.

For Institutional Investors

Important Legal Information: By clicking “I agree” you are confirming you are an Institutional Investor and that you are aware the website you will enter is intended for an institutional investor, not the general public.

Before continuing, please read the following important information that you have read and agree to these provisions and the Terms & Conditions of Use of this website for Institutional Investors.
 

TERMS & CONDITIONS OF USE

Use of the Dodge & Cox website ("Site"), owned and operated by Dodge & Cox®, signifies that you accept the following Terms of Use. Nothing contained in these Terms of Use is intended to modify or amend any other written agreement, if any, that may currently be in effect between you and Dodge & Cox or any funds managed by Dodge & Cox. Dodge & Cox may periodically modify these Terms of Use, and any such modifications will be effective immediately upon posting. We suggest that you periodically check these Terms of Use for modifications. If you do not agree to the Terms of Use, do not use this Site.

We suggest that you check the Terms of Use periodically for changes. The Terms of Use can be accessed from the link at the bottom of the Site pages. Dodge & Cox expressly reserves the right to monitor any and all use of this Site, without liability.


PRIVACY POLICY

Dodge & Cox expressly reserves the right to monitor any and all use of this Site; any such monitoring will be used for Dodge & Cox’s internal business purposes without liability. Dodge & Cox is committed to maintaining the confidentiality, integrity, and security of your personal and financial data. We consider this information to be private and held in confidence between you and Dodge & Cox. We would like you to know about our policies to protect the privacy of this information.

We may collect nonpublic personal information about you from:

  • You or your representative in writing, electronically or by phone (e.g., in account applications or requests for forms or literature);
  • Transactions initiated by you or made on your behalf; and
  • Information we receive from third parties, such as financial advisers, consumer reporting agencies, consultants and custodians.

We do not disclose nonpublic personal information about current or former clients or shareholders to any third parties except as necessary to effect a transaction, administer your account, or as otherwise permitted by law. For example, the Dodge & Cox Funds and Dodge & Cox Worldwide Funds use third-party transfer agents and third-party providers of systems who use your information only to process or analyze transactions you have requested. Contracts with these organizations contain provisions restricting their use of your nonpublic personal information to those purposes for which they were hired.

We restrict access to nonpublic personal information about you to those employees and service providers involved in administering or servicing your account(s) or helping us meet our regulatory obligations. We maintain physical, electronic, and procedural safeguards that comply with federal standards to protect your nonpublic personal information. In addition, our Code of Ethics, which applies to all Dodge & Cox employees, restricts the use of your nonpublic personal information.

This privacy policy applies to Dodge & Cox, the Dodge & Cox Funds, and the Dodge & Cox Worldwide Funds.

COOKIES POLICY

What are cookies?
A "cookie" is a small text file of coded information that is stored in your web browser or locally on the memory of your computing device by a website. Cookies enable a website to identify your device, determine when you have visited, what pages you viewed, and can store personal settings or preferences. Cookies are intended to make the web browsing experience more efficient.

How does Dodge & Cox use cookies?
The cookie settings on this website are set to allow cookies. Dodge & Cox uses cookies to improve your browsing experience by remembering your personal preferences and that you have agreed to these Terms & Conditions of Use. We do not collect any personally identifiable information about you in a cookie.

Browser cookie control
All modern web browsers provide a level of control over cookies. Users can customize a browser to accept or reject cookies. Users can also remove any cookies that have been stored by a browser. To manage your browser cookie settings, navigate to the browser's privacy options, usually found within the Tools menu of the program. Please note that while many websites require cookies to be accepted in order to function correctly, this website will still function with cookies disabled, though in a less streamlined way.

LIMITED LICENSE AND RESTRICTIONS ON USE

Dodge & Cox grants you a limited, revocable, nonexclusive, nontransferable license to view, store, bookmark, download, and print the pages within this Site solely for your personal, informational, and noncommercial use or as expressly authorized by Dodge & Cox in writing. You are responsible for obtaining and maintaining all equipment, services, and other materials that you need to access this Site. Dodge & Cox reserves all rights not expressly granted in these Terms of Use. Except as otherwise stated in these Terms of Use as expressly authorized by Dodge & Cox in writing, you may not:

  • Modify, copy, distribute, transmit, post, display, perform, reproduce, publish, broadcast, license, create derivative works from, transfer, sell, or exploit any reports, data, information, content, software, RSS and podcast feeds, products, services, or other materials on, generated by or obtained from this Site, whether through links or otherwise (collectively, "Materials");
  • Redeliver any page, text, image or Materials on this Site using "framing" or other technology;
  • Engage in any conduct that could damage, disable, or overburden (i) this Site, (ii) any Materials or services provided through this Site, or (iii) any systems, networks, servers, or accounts related to this Site, including without limitation, using devices or software that provide repeated automated access to this Site, other than those made generally available by Dodge & Cox;
  • Probe, scan, or test the vulnerability of any Materials, services, systems, networks, servers, or accounts related to this Site or attempt to gain unauthorized access to Materials, services, systems, networks, servers, or accounts connected or associated with this Site through hacking, password or data mining, or any other means of circumventing any access-limiting, user authentication or security device of any Materials, services, systems, networks, servers, or accounts related to this Site;
  • Modify, copy, obscure, remove or display the Dodge & Cox, Dodge & Cox Funds, or Dodge & Cox Worldwide Funds name, logo, trademarks, text, notices, or images without Dodge & Cox’s express written permission. To obtain such permission, you may e-mail us at [email protected]; or
  • Include the term "Dodge & Cox®," or any Dodge & Cox trademark or executive's name, or any variation of the foregoing, as a meta-tag, hidden textual element, or any other indicator that creates an impression of affiliation, sponsorship, or endorsement by Dodge & Cox.

COPYRIGHT POLICY, NOTICE AND CLAIM INFORMATION

Dodge & Cox owns and operates this Site. All Materials on this Site, whether separate or compiled, including but not limited to, text, graphics, and audio clips. Logos, buttons, images, digital downloads, data compilations, software, icons, html code and xml code, as well as all copyright, patent, trademark, trade dress, and other rights therein, are owned or licensed by Dodge & Cox® and its third-party information providers, and are protected by United States and international intellectual property laws.

Pursuant to Section 512(c)(2) of the U.S. Copyright Revision Act, as enacted through the Digital Millennium Copyright Act, Dodge & Cox designates an agent as described below to receive notifications of claimed copyright infringement by mail: 
Roberta R. Kameda, Esquire, General Counsel, Dodge & Cox, 555 California Street, 40th Floor, San Francisco, CA 94104.

The designated copyright agent can also be reached by telephone at (800) 254-8494, by fax at (415) 986-1369, and by e-mail at [email protected].


LINKING CONDITIONS

You may not link to this Site unless you comply with these linking conditions ("Linking Conditions"). Dodge & Cox grants you a limited, revocable, nonexclusive right to create a hyperlink to this Site ("Link"), provided you comply at all times with the following conditions:

  • The Link must be made to the Funds' home page at www.dodgeandcox.com.
  • The text of the Link must read either “Dodge & Cox”, “Dodge & Cox Funds”, “Dodge & Cox Worldwide Funds”,  or dodgeandcox.com. You may not use any Dodge & Cox logo or graphic or any other Dodge & Cox trademark, as part of the Link without Dodge & Cox's express written permission; and 
  • The Link and surrounding context on the linking site must not: (a) falsely represent or misrepresent any relationship between the linking site and Dodge & Cox, including suggestions of affiliation, endorsement, or sponsorship; (b) portray Dodge & Cox or its affiliates or their products or services, in a false, misleading, derogatory, or otherwise offensive manner; or (c) deliver the Materials in a framed environment or alter the layout, content, look, or feel of the Site.

If you have created a Link that conforms to these Linking Conditions, then you also may include one or more Links to any internal or subsidiary page of this Site that is located one or several levels down from the homepages (known as "deep links"), provided, however, that all such deep links must be in close physical proximity to the Link that conforms to the Linking Conditions. You may not maintain numerous or pervasive Links to this Site.

DATA, INFORMATION AND CONTENT

The Materials on this Site are for information, education, and noncommercial purposes only. Although Dodge & Cox may provide data, information, and content relating to investment approaches and opportunities to buy or sell securities and/or mutual funds, you should not construe any such information or other content available through this Site as legal or tax advice. You alone will bear the sole responsibility of evaluating the merits and risks associated with the use of any Materials on this Site before making any decisions based on such Materials. In exchange for using such Materials, you agree not to hold Dodge & Cox or its affiliates and their directors (trustees), officers, employees, or third-party information providers liable for any possible claim for damages arising from any decision you make based on the Materials made available to you through this Site. By providing access to other websites, neither Dodge & Cox nor any of its affiliates is recommending the purchase or sale of the stock issued by any company, nor are they endorsing services provided by any website's sponsoring organization.

OWNERSHIP OF OTHER MATERIALS

All trademarks, service marks, and logos appearing on this Site are the exclusive property of their respective owners.

All Dodge & Cox graphics, logos, page headers, and service names are trademarks, service marks, or trade dress of Dodge & Cox. Dodge & Cox's trademarks, service marks and trade dress may not be used in connection with any product or service that is not Dodge & Cox's, in any manner that is likely to cause confusion among customers or investors, or in any manner that disparages or discredits Dodge & Cox. Nothing contained on this Site should be construed as granting any license or right in or to any trademarks, service marks, or trade dress of Dodge & Cox.


THIRD-PARTY CONTENT

Data and other materials appearing on this Site that are provided by third parties are believed by Dodge & Cox to be obtained from reliable sources, but Dodge & Cox cannot guarantee and is not responsible for their accuracy, timeliness, completeness, or suitability for use. Dodge & Cox is not responsible for, and does not prepare, edit, or endorse, the content, advertising, products, or other materials on or available from any website owned or operated by a third party that is linked to this Site via hyperlink. The fact that Dodge & Cox has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Dodge & Cox with respect to such website, its owners, providers, or services.  You will use any such third-party content at your own risk.
 

WARRANTY DISCLAIMERS

YOU EXPRESSLY UNDERSTAND AND AGREE THAT:

THERE ARE NO IMPLIED OR EXPRESSED WARRANTIES ON THE MATERIALS IN THIS SITE; THE MATERIALS ARE PROVIDED "AS IS" AND "AS AVAILABLE BASIS." DODGE & COX, AFFILIATES, AGENTS, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, LICENSORS AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS DISCLAIM, TO THE FULLEST EXTENT UNDER APPLICABLE LAW, ANY WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THIS SERVICE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND ALL WARRANTIES REGARDING SECURITY, CURRENCY, CORRECTNESS, QUALITY, ACCURACY, COMPLETENESS, RELIABILITY, PERFORMANCE, TIMELINESS, OR CONTINUED AVAILABILITY, WITH RESPECT TO (I) THE SITE; (II) ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE ON OR THROUGH THE SITE; (III) USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES; AND (IV) THE RESULTS OF THE USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES. FURTHER, DODGE & COX, AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS EXPRESSLY DISCLAIM ALL WARRANTIES WITH RESPECT TO ANY DELAYS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE THROUGH THIS SITE. EXCEPT AS PROVIDED BY LAW, NEITHER DODGE & COX NOR ITS THIRD-PARTY INFORMATION PROVIDERS AND VENDORS HAS ANY RESPONSIBILITY TO MAINTAIN THE MATERIALS, PRODUCTS, OR SERVICES OFFERED ON THE SITE OR TO SUPPLY CORRECTIONS, UPDATES, OR RELEASES FOR THE SAME. USE OF THIS SERVICE IS AT YOUR OWN RISK. REFERENCE TO A FUND OR SECURITY ANYWHERE ON THIS WEB SITE IS NOT A RECOMMENDATION TO BUY, SELL, OR HOLD THAT OR ANY OTHER SECURITY. IF YOU LIVE IN A STATE THAT DOES NOT ALLOW DISCLAIMERS OF CERTAIN WARRANTIES, SOME OF THE ABOVE EXCLUSIONS MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND MAY HAVE OTHER RIGHTS, WHICH VARY FROM JURISDICTION TO JURISDICTION.

LIABILITY AND INDEMNITY

ANY MATERIALS DOWNLOADED OR OTHERWISE OBTAINED THROUGH THIS SITE ARE DONE AT YOUR OWN RISK. YOU ARE SOLELY RESPONSIBLE FOR ANY DAMAGE TO YOUR COMPUTER SYSTEM OR OTHER EQUIPMENT, OR LOSS OF DOWNLOADED OR OBTAINED DATA THAT RESULTS FROM SUCH DOWNLOAD.

NEITHER DODGE & COX NOR ITS AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, OR ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS WILL BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO, DAMAGES FOR LOSS OF PROFITS, REVENUE, INCOME, GOODWILL, USE, DATA, OR OTHER INTANGIBLE LOSSES, OR DAMAGES CAUSED BY THEFT, UNAUTHORIZED ACCESS, SYSTEMS FAILURE, OR COMMUNICATIONS LINE FAILURE, OR THE COST OR PROCURING SUBSTITUTE GOODS OR SERVICES, CAUSED BY THE USE OF OR INABILITY TO USE THE SITE, MATERIALS OR ANY PRODUCTS OR SERVICES PROVIDED HEREIN, OR ANY OTHER MATTER RELATING TO THIS SITE, EVEN IF DODGE & COX HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE EXCLUSIONS OR LIMITATIONS MAY NOT APPLY TO YOU. TO THE EXTENT THAT A JURISDICTION DOES NOT PERMIT THE EXCLUSION OR LIMITATION OF LIABILITY AS SET FORTH HEREIN, THE LIABILITY OF DODGE & COX AND ITS AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS IS LIMITED TO THE EXTENT PERMITTED BY LAW IN SUCH JURISDICTIONS.

You agree to indemnify, defend, and hold harmless Dodge & Cox, its affiliates, and each of its and their officers, directors (and trustees), employees, and agents, from and against all claims, demands, liabilities, damages, losses, or expenses, including attorney's fees and costs, arising out of or related to your improper access to or use of this Site, or any violation by you of these Terms of Use.

Dodge & Cox does not claim that materials in this Site are appropriate or available for use in all locations. Because of the global nature of the Internet, you agree to comply with all local rules with respect to your online conduct, including all laws, rules, codes, and regulations of the country in which you reside and the country from which you access this Site, including without limitation, all laws, rules, codes, regulations, decrees, acts, orders, directives, legislation, bills, and statutes pertaining to tax, contracts, intellectual property, securities, e-commerce, banking, technology, computers, fraud, and privacy.

Each investment product and service referred to on this Site is intended to be made available only to persons where that product or service is registered and/or licensed for sale or where such registration or licensing is not required. This Site will not be considered a solicitation for or offering of any investment product or service to any person in any jurisdiction where such solicitation or offering would be illegal.

TIMELINESS OF CONTENT

All content on this Site is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.


TERMINATION

The rights granted to you herein terminate immediately if you fail to comply with the Terms of Use. Dodge & Cox, in its sole discretion, reserves the right to temporarily or permanently terminate your access to and use of this Site at any time and for any reason whatsoever, without notice or liability. Dodge & Cox will not be liable to you or any third party for any termination of your access to or use of this Site.

INTEGRATION AND SEVERABILITY

If any provision of these Terms of Use is deemed unlawful, void, or for any reason unenforceable, then that provision will be deemed severable from these Terms of Use and will not affect the validity and enforceability of the remaining provisions. The preceding Terms of Use represent the entire agreement between Dodge & Cox and the user relating to the subject matter herein.

Terms of Use as of: February 2022

 

Pension Perspectives

Q4 2021 Pension Perspectives

January 2022

 

Key Takeaways

  • Aggregate single-employer plan funded status rose to nearly 100% in the fourth quarter, the highest level since September 2008.
  • In addition to overall asset class de-risking, plan sponsors may consider further protecting funded status gains by reducing equity beta within return-seeking assets (e.g., via multi-sector credit) and implementing a more precise credit spread hedge (e.g., by introducing an intermediate- or core-duration credit component).
  • At the same time, generating alpha to offset adverse assumption changes and plan experience remains important. Given a strong macro backdrop, tight credit spreads, and the potential for heightened issuer return dispersion, current opportunities include a modest short duration positioning and a continued focus on issuer selection within credit.
  • Pension risk transfer (PRT) has likely set a record for 2021 and continues to be a strategic consideration. However, contribution relief, balance sheet considerations, and new tools to evaluate and potentially off-load mortality risk may complicate PRT decisions.

Quarterly Funded Status Drivers 

 

Figure 1 :  Funded Status Drivers

Source: Bloomberg Index Services, Milliman, MSCI. The funded status and discount rate are for the Milliman 100 Pension Funding Index.

Many plan sponsors experienced an improvement in funded status during the fourth quarter, as equity markets rallied and credit spreads widened modestly, offsetting a decline in long Treasury yields. According to Milliman, the aggregate funded status of the 100 largest corporate pension plans ended the quarter at 99.6%, representing an increase of 2.5% since the prior quarter end and a meteoric 9.3% increase since the beginning of the year. Despite a historically high Consumer Price Index print in November, healthy GDP growth (even in the face the Delta and Omicron variants), and the Fed’s tapering announcement, the yield curve actually flattened with the 30-year Treasury yield falling 14 bp2, the 10-year yield remaining relatively stable at 1.51%, and the 2-year yield rising 46 bp. The Omicron variant broke credit spreads out of an 8-month period of relative stability, as the Bloomberg U.S. Long Credit Index spread rose to 138 bp in early December and ended the quarter at 130 bp. This was 7 bp higher than at the end of the third quarter, but still well-below its 10-year average of 176 bp. Similarly, equity markets (as measured by the MSCI All Country World Index) erased nearly two-thirds of their quarter-to-date gain in late November, but made up most of that decline in December.

Positioning Pension Assets for 2022

        Following a sharp increase in funded status in 2021 and broad de-risking steps along pension glide paths, plan sponsors may now want to consider incrementally reducing funded status risk by “fine-tuning” the investment strategy and (re-)exploring targeted non-investment de-risking options (such as plan amendments, lump sum windows, or pension risk transfers). However, alpha generation still remains relevant and not only for accruing plans or plans that are still underfunded on an accounting or termination basis. A good reminder of that came in October in the annual mortality assumptions update from the Society of Actuaries, which, if adopted, would increase typical accounting liabilities by 0.2% to 0.4%, the first such increase since 2014. While this increase may be offset by reductions due to COVID-related deaths, other factors (e.g., elevated early retirements) may also increase liabilities. Thus, guarding against adverse assumption changes and plan experience continues to be important.
        Below we outline a few investment ideas that may help balance the twin goals of protecting funded status and generating alpha in today’s environment. We also share observations on pension risk transfer and mortality risk.

Return-Seeking Assets Diversification

After three consecutive years of double-digit returns in the equity markets led largely by high-priced growth stocks (especially technology), it may be worth considering a modest reduction in equity beta (aside from rebalancing into liability hedging assets). One such approach would be to incorporate an allocation to low-duration, multisector credit such as bank loans and high yield bonds, and, if the investment horizon allows, private credit. Within equities, given persistent growth-value valuation differentials and potential headwinds for the technology sector, an overweight to value over growth may also be sensible. In our view, these strategies could reduce risk while continuing to emphasize return generation.

Figure 2: Sample Fully Funded Plan Asset Allocations

Source: Dodge & Cox.3 CSHR is the credit spread hedge ratio.

Asset Allocation A
While well hedged from an interest rate risk perspective, the plan is overhedging liability credit spread risk, both in total (111% credit spread hedge ratio) and at the long end of the curve (126% credit spread hedge ratio in the 10-30 year maturity range). As a result, the asset allocation exhibits a bias towards tightening spreads, and spread widening is likely to reduce funded status.

Asset Allocation B
By shifting 15% from Long Credit to Intermediate Credit (and adjusting the completion portfolio to maintain 100% interest rate hedge ratio across the curve), Asset Allocation B alleviates these risks. The total credit spread hedge ratio falls to 93%, and the credit spread hedge is distributed across maturities more evenly. This is also reflected in funded status risk, which drops by almost 20%, from 2.9% to 2.4%.

It may be reasonable to maintain a total credit spread hedge ratio of under 100% due to the presence of return-seeking assets, which are typically correlated with credit spreads.

More Precise Credit Spread Hedging

Analogous to completion (which seeks to hedge interest rate risk granularly across maturities), a more refined approach to credit spread hedging can also reduce funded status risk, especially for well-funded and mature plans. In particular, incepting an Intermediate Credit allocation (funded either from return-seeking assets or Long Credit) can help mitigate the possibility that liability credit spread risk, especially at the long end, is overhedged, while also potentially providing a more even hedge across maturities (Figure 2). Furthermore, adjusting the balance between Treasuries and credit to match the nature of the liability discount rate (i.e., more Treasuries for a broad AA discount rate and more credit for an above-median or otherwise “high” AA discount rate) can also help reduce funded status risk. Reflecting these considerations, we have noted growing interest in our Intermediate Credit strategy over the last year.

Figure 3: U.S. Treasury Yield Curves

Source: Bloomberg Index Services

A Modest Tactical Interest Rate Bet

While this quarter’s yield curve flattening was a good reminder that interest rate bets do involve risk, a modest duration underweight may continue to make sense for plan sponsors willing to take such risks. While Treasury yields are still well below their pre-COVID levels, and even lower than March 2021 levels at the long end of the curve, we are wary that the strong economic backdrop, elevated inflation, and the upcoming Fed tightening may increase the potential for yields to rise and for the curve to steepen (Figure 3). We remain approximately 0.75 years, or 5%, short duration in our full-discretion Long Credit strategy.

Continued Allocation to Active Credit

While long credit spreads finally broke out of their 2021 range in the fourth quarter, investment-grade (IG) credit remains a natural liability hedge and a source of potential alpha relative to liabilities. Although overall credit fundamentals remain strong and forecast supply is not overextended, spread volatility and issuer dispersion may increase due to continuing inflationary pressures, increasing M&A activity, and potentially rising interest rates. This dynamic may provide opportunities to generate credit alpha through both issuer selection within IG credit and tactical out-of-benchmark positions in select below-investment-grade issuers, taxable municipals, and Agency mortgages. For example, the short-lived spread widening at the end of November allowed us to incrementally add exposure in high-conviction names at attractive valuations.

Pension Risk Transfer, Contributions, and Mortality Risk

Although 2021 was likely a banner year for pension risk transfer (PRT) activity, it was also a momentous year for pension contribution relief, due to legislative actions—notably the American Rescue Plan Act in March and the Infrastructure Investment and Jobs Act in November. The new contribution regime, better tools for estimating plan-specific longevity, and potential innovations in the longevity risk space may make PRT decisions more complex going forward. 
        In the third quarter, staggering $16.5 billion in U.S. pension risk transfers (PRT)—a quarterly amount not seen since the GM and Verizon mega-deals of 2012—likely pushed full calendar year 2021 PRT activity into record territory. With continued strong funded status, a growing and well-capitalized group of insurers bidding on PRT, and plenty of pension liabilities still available (e.g., PRT still comprises only 1.0% to 1.5% of U.S. single-employer liabilities), we anticipate industry-wide PRT activity to remain strong in 2022.
        Still, the economics of PRTs need to be carefully evaluated, especially for large plan sponsors who have already transferred the most attractive liabilities. In particular, transferring liabilities reflecting complex benefit formulas (such as cash balance plans with bond-based crediting rates), healthy retiree groups, and terminated vested participants remains more costly and may not be as advantageous in light of the reduced contribution requirements. Furthermore, thanks to their actuaries and third-party providers, plan sponsors can now more granularly estimate their population-specific mortality risk, reflecting not only age and gender, but also socioeconomic status and geographical location, which puts them in a better position to evaluate—and potentially reject—PRT bids. Finally, despite the attendant risks, some plan sponsors may view an overfunded plan as an asset that generates pension income and a tool in potential M&A transactions that involve underfunded plans.
        In conclusion, we note that the PRT toolkit for U.S. plan sponsors may expand in 2022 to include a longevity risk transfer (LRT) product, akin to longevity swaps, which are common in the UK pension space. At a high level, LRT allows a plan sponsor to off-load mortality risk to an insurer: a plan sponsor pays the insurer a specified, fixed stream of pension cash flows plus a specified annual premium in exchange for the insurer paying actual benefit payments to plan participants. Unlike PRT, which removes all pension risk at once, LRT leaves the plan on the balance sheet, allows for more plan sponsor flexibility over time, and is likely less costly (as the plan sponsor retains investment risk). These factors may make LRT attractive to some plan sponsors.
        We would welcome the opportunity to speak with you about your pension risk management objectives for 2022 and beyond. 

Disclosures

The above information is not a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Dodge & Cox makes no representations as to the completeness or accuracy of such information. Opinions expressed are subject to change without notice. Information regarding yield, quality, maturity, and/ or duration does not pertain to accounts managed by Dodge & Cox. The above returns represent past performance and do not guarantee future results. Dodge & Cox does not seek to replicate the returns of any index. The actual returns of a Dodge & Cox managed portfolio may differ materially from the returns shown above. This is not a recommendation to buy, sell, or hold any security and is not indicative of Dodge & Cox’s current or future trading activity. The securities identified are subject to change without notice and may not represent an account’s entire holdings. 

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance, L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material, guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, shall have no liability or responsibility for injury or damages arising in connection therewith. The Bloomberg U.S. Long Credit Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related debt with at least ten years to maturity. It is composed of a corporate and a non-corporate component that includes non-U.S. agencies, sovereigns, supranationals and local authorities.

The MSCI ACWI (All Country World Index) Index is a broad-based, unmanaged equity market index aggregated from 50 developed and emerging market country indices. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This publication is not approved, reviewed, or produced by MSCI.

Endnotes

The information in this paper should not be considered fiduciary investment advice under the Employee Retirement Income Security Act. This paper provides general information not individualized to the particular needs of any plan and should not be relied on as a primary basis for investment decisions. The fiduciaries of a plan should consult with their advisers as needed before making investment decisions.
2  One basis point is equal to 1/100th of 1%.
3  For illustrative purposes only. The plan is assumed to be fully-funded. Funded status risk reflects volatility and correlations for relevant market indices for the 10-year period ending December 31, 2021 and accounts only for investment component of funded status risk.