In search of the liability asset

• Autores: Richard Bookstaber, Jeremy Gold
• Localización: Financial analysts journal, ISSN-e 0015-198X, Vol. 71, Nº. 1, 2015, págs. 18-28
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • When one looks beyond the immediate pension plan liabilities represented by existing obligations, one sees a stream of long-term obligations that will shift as underlying economic factors such as inflation and productivity change. Thus the pension liability may be broken down into a short-term, bond-like component and a long-term, equity-like component. Plan investments need to meet the immediate obligations and avoid deterioration of the current asset/liability ratio, but they also need to maximize long-term returns in order to meet the long-term obligations.

    An all-equity portfolio meets the latter need, but is far too risky in the short term. A fully hedged, dedicated portfolio will ensure that short-term obligations are met, but will do little to increase asset value to meet the incremental, long-term obligations. The task confronting the pension plan sponsor is to construct the liability asset�the asset that will meet these disparate aspects of the pension liability.

    Doing so requires a dynamically adjusted asset mix, where equity exposure is increased as the surplus value rises and assets are shifted to an immunized portfolio to match the interest-rate sensitivity of the liabilities as surplus value erodes. The resulting strategy, called surplus insurance, provides a minimum surplus floor value while allowing the highest expected return on plan assets, and therefore the greatest possibility of meeting the long-term obligations.