Pension Plan Risk Management. Phil Kivarkis, FSA, EA, CFA, Director of Investment Policy Services Hewitt EnnisKnupp. Pension Funded Status – A Wild Ride. US Debt Rating Downgrade. 2008 Credit Crisis.
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Pension Plan Risk Management
Phil Kivarkis, FSA, EA, CFA, Director of Investment Policy Services
US Debt Rating Downgrade
2008 Credit Crisis
S&P 500 aggregate pension funded status shows considerable volatility, and two extreme events in three years
What changes have you made to your target investment strategy?
Source – Aon Hewitt Pension Risk Survey
Yields are below historic levels…
Source: Citigroup Pension Discount Curve
Very steep yield curve…
CMT = Constant Maturity Treasury
Favorable credit spreads…
Source: Barclays Capital
Note: S&P 500, US plans only.
Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.
Source: Hewitt EnnisKnupp capital markets expectations
Improved Performance and More Effective Risk Management.
Structural Surplus Risk
More Effective Hedge
Custom MandateLong Credit – 80%
STRIPS 20+ yrs – 20%
Source: Hewitt EnnisKnupp
Two-Dimensional Glide Paths offer a way to manage a pension plan out of the current low interest rate environment.
The glide path implies a certain liability hedging path…
Glide Path Hedge Ratio
…but liabilities and interest rate views also imply certain liability hedging possibilities.
Max Hedge Ratio Using Physical Bonds
Max Rewarded Upside from Rising Rates