Talk about timely. Diakon Lutheran Social Ministries wasn't expecting a financial meltdown when it decided in 2007 to revise the investment strategy for its defined-benefit pension plan. But the changes it made served it well in 2008, cushioning the plan, with $50 million in assets, from the worst of the market's losses.
Diakon, a 501(c)3 organization that operates retirement communities and provides social services, is not subject to ERISA, but it holds itself to the funding standards imposed on ERISA plans. Given the capital investment required by its retirement communities, Diakon was looking for a strategy that would limit big changes in its annual pension contributions, says Richard Barger, Diakon's CFO and executive vice president. "We want to have some predictability around the amount of annual funding that we put into the plan because we have significant cash needs in terms of investing in our ministry."
Diakon reworked its asset allocation with the help of SEI, the investment solution provider, which used stochastic modeling to examine more than 100 investment strategies. Among the changes Diakon made based on SEI's recommendations was to increase the duration of its fixed-income assets to bring them in line with the duration of the liabilities. To enhance returns, it moved 5% of its assets out of equities and into a hedge fund of funds. And in the fall of 2008, Diakon stopped rebalancing its portfolio, a move that it estimates averted losses that could have totaled from 3% to 5% of the portfolio's assets.
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"We wanted a funding strategy that was fairly predictable and to make sure that once we put the money in the fund, it's invested in a way so there's not a lot of volatility," Barger says. "We're not going to benefit as much when the market goes up, but we have less risk when the market goes down."
Barger says the best evidence of the strategy's value is the fact the portfolio lost just 8% last year; Diakon calculates that if it had stuck with its previous investment strategy, it would have lost 10% more, or another $5.3 billion.
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