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A Powerful 3 Step Strategy: Increase Expected Return on Pension Assets at the Same (or Lower) Level of Funded Status Risk

A Powerful 3 Step Strategy: Increase Expected Return on Pension Assets at the Same (or Lower) Level of Funded Status Risk

It is possible for pension plan sponsors to increase expected returns on assets by 100 to 300 basis points (1-3%) per year for the same or lower funded status risk. The process and steps are spelled out below. Follow along and you’ll see how to increase expected returns, potentially cutting years off of the time required to reach full funding while also decreasing the pension expense reported in the financial statements.

Replicating Private Equity

Replicating Private Equity

Private Equity is illiquid and challenging to benchmark. Many investors use “S&P 500 +3%” in order to compare performance in the absence of an observable, investable asset. This paper describes a methodology for creating a private equity proxy or replication strategy using derivatives.

Pension Investing – Next Generation of Glide Paths

Pension Investing – Next Generation of Glide Paths

Pension plan sponsors, especially those with frozen pension plans, have spent significant time deciding on the most appropriate balance between growth (return seeking/equities) and hedging (liability matching/long-term bonds) assets to meet their objectives. For most, the ideal goal is to fully fund the pension plan through a balance of investment performance, cash contributions and a rising interest rate environment while not subjecting themselves to higher than desired funded status risk.

Synthetic Equity and Pension Plan De-Risking

Synthetic Equity and Pension Plan De-Risking

Pension plans typically de-risk by buying liability matching bonds and selling equities. Although this is a perfectly valid approach, it results in a direct tradeoff between the desire to reduce funded status volatility versus maintaining higher expected returns. Derivatives, however, provide plan fiduciaries with additional flexibility versus simply allocating between these two asset types. A derivative strategy we call ‘Synthetic Equity’ can be used by pension plans to maintain expected returns and retain equity exposure, yet still reduce funding level volatility.