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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

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Pension plan risk management

Pension Plan Risk Management

Phil Kivarkis, FSA, EA, CFA, Director of Investment Policy Services

Hewitt EnnisKnupp

Pension funded status a wild ride

Pension Funded Status – A Wild Ride

US Debt Rating Downgrade

2008 Credit Crisis

S&P 500 aggregate pension funded status shows considerable volatility, and two extreme events in three years

Our survey shows broad risk management focus

Our Survey Shows Broad Risk Management Focus



















What changes have you made to your target investment strategy?

Source – Aon Hewitt Pension Risk Survey

Integrated risk management toolkit

Integrated Risk Management Toolkit

Risk Management


and Methods







  • Glide Path

  • Hedge path

  • Credit path

  • Return-seeking portfolio

  • Hedging portfolio

  • Synthetics/Collars

  • Pre-funding

  • Borrow to fund

  • Fund equity

  • Stabilizer

  • Close

  • Freeze

  • Cash Balance/ Career Average

  • Lump Sums

  • Asset smoothing

  • Rate averaging

  • Conservatism

  • Aggressiveness


Current interest rate environment is challenging

Current Interest Rate Environment is Challenging

Yields are below historic levels…


Source: Citigroup Pension Discount Curve

Some opportunities exist

Some Opportunities Exist

Very steep yield curve…

CMT = Constant Maturity Treasury

Favorable credit spreads…

Source: Barclays Capital

Pension plans have already begun to de risk as seen in actual allocations

Pension Plans Have Already Begun to De-RiskAs Seen in Actual Allocations

Note: S&P 500, US plans only.

Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.

Dynamic investment policy components

Dynamic Investment Policy Components

Improving your odds

Improving Your Odds

Source: Hewitt EnnisKnupp capital markets expectations

Why customize

Why Customize?

Improved Performance and More Effective Risk Management.

Structural Surplus Risk

More Effective Hedge

Custom MandateLong Credit – 80%

STRIPS 20+ yrs – 20%

Source: Hewitt EnnisKnupp

Illustrative Example

Alternative to immediate extension two dimensional glide paths

Alternative to Immediate Extension: Two-Dimensional Glide Paths

Two-Dimensional Glide Paths offer a way to manage a pension plan out of the current low interest rate environment.

First Dimension

Funded Ratio



Second Dimension


InterestRate Level

Hedge Ratio

Liability hedging path design

Liability Hedging Path Design

The glide path implies a certain liability hedging path…

Glide Path Hedge Ratio

Liability hedging path design hedge path corridor

Liability Hedging Path Design: Hedge Path Corridor

…but liabilities and interest rate views also imply certain liability hedging possibilities.

Max Hedge Ratio Using Physical Bonds

Max Rewarded Upside from Rising Rates

Integration of hedge path and the glide path illustrative

Integration of Hedge Path and the Glide Path - Illustrative

  • Key Characteristics

  • Tailored to Plan glide path and funded ratio goals

  • Incorporates Client’s interest rate views (and ours)

  • Provides guidance while leaving flexibility to execute

    • Market opportunities (medium term views)

    • Available instruments

Hedge path development steps

Hedge Path Development Steps

  • Design Glide Path (if one doesn’t exist already)

  • Review Risk Budget and Investment Horizon

  • Develop a Hedge Path to Complement Glide Path

  • Develop an Execution Strategy

    • Update Investment Policy Statement

    • Consider Outsourcing Execution

    • Update Reporting to Include Hedge Path

  • Transition the Portfolio to Target Hedge Ratio on Hedge Path

    • Credit vs Government

    • Yield Curve Positioning

    • Use of Physicals and Synthetics

Key takeaways

Key Takeaways

Current Environment

  • Steep curve, spreads favorable

  • Asset return risk meaningful

  • De-risking and defeasance trends persist

Duration Extension

  • Two-dimensional paths provide framework for change

  • Ultimately, risk management drives hedge ratio

Customized Portfolios

  • Customization can improve hedging characteristics

  • Relative importance increases with hedge ratio

  • Diversification improves odds of success

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