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Pension Risk Management Solutions.

A well-implemented pension risk management solution helps plans manage risk to ensure they will have sufficient assets to pay their participants in the future.  When developing a solution, we focus on efficiently managing funded status outcomes and minimizing funded status volatility.  

The three main sources of US defined benefit plan funded status volatility are unhedged exposures to interest rates, credit spreads, and equities.  Pension liabilities are discounted using high quality corporate bond yields, which consist of a Treasury component and a credit spread component; therefore, discount rates (and the corresponding present value of liabilities) are impacted by changes in both.  

Plans often allocate to Treasuries and long duration corporate bonds to hedge their liabilities.  Equities are used to improve pension asset portfolio returns, but can also introduce significant funded status volatility.  In an LDI context, each of these risks should be considered and mitigated (wherever prudent) to minimize asymmetric exposure between the market value of assets and the present value of liabilities.  

Interest rate risk

Interest rate risk:  The duration mismatch between assets and liabilities causes an asymmetric shift in the market value of assets and present value of liabilities as Treasury yields change.  

Credit spread risk

Credit spread risk:  The spread duration mismatch between assets and liabilities causes an asymmetric shift in the market value of assets and present value of liabilities as credit spreads change.  

Equity market risk

Equity market risk:  The risk that the value of an investment will decrease due to movements in market factors.  Equity market volatility is not highly correlated with the changes in the value of liabilities and can cause significant changes in funded status.  

Our philosophy

Pension liabilities are uninvestable and do not have default risk.  Our solutions seek to shape funded status outcomes and minimize funded status volatility due to changes in interest rates, credits spreads, and equities.  

Funding ratio outcomes are most efficiently managed by:
          Separating the Credit and Treasury components
          Setting the hedging portfolio’s strategic benchmark in a total portfolio context
          Actively managing between hedging tools based on the market environment
          Within a corporate bond component, avoiding downgrades and defaults

Our Capabilities

We provide funded status risk management, strategic derivatives solutions, and specialized governance and support services to our Solutions clients.   


How we differentiate ourselves

LDI is a core investment competency

At LGIMA, LDI is a core investment competency and a stand-alone business – not a virtual team spanning multiple silos. Our active LDI process focuses on opportunistically improving funded status outcomes while seeking to minimize volatility. Resourcing LDI in this manner takes greater investment, but leads to clearer accountability and more focused LDI people, philosophy, process and tools.

We offer a full range of LDI solutions

Our ability to customize solutions ranges from the efficient management of long duration bond portfolios (Level 1 LDI) to the daily risk management of asset portfolios tied to explicit liability based benchmarks (Level 2 LDI) to endgame solutions for plan runoff or annuity buyout (Level 3 LDI).  We manage funded status outcomes across equity, interest rate, and credit risk.  LGIMA offers client s access to a full suite of de-risking solutions on a both a pooled and segregated basis.  We have also developed and implemented custom de-risking solutions for cash balance exposures.  

We discuss our Level 1 LDI process at length here  and our Level 2 LDI process at length here .

Cutting edge strategic derivative solutions

We have industry leading experience in developing and implementing customized derivative strategies to benefit from pension asymmetry and shape funded status outcomes.  We have made significant investments in the systems and personnel required to maintain and build upon our leadership role in the space.  

Please click links below to learn more about some of our derivative strategies for pensions:

Stock replacement strategy for pension plans: utilizing calls to replicate physical equities (PDF: 201KB)  

1x2 call spread overlays - increasing at the money equity upside at expense of distant unneeded upside (PDF: 169KB)  

Selling rate upside to hedge equity downside (PDF: 93KB)  

We provide effective liability risk management

LGIMA's actuarial capabilities enable a comprehensive understanding of client liabilities. Our explicit liability benchmarking and custom reporting enhance the governance process. Our active LDI establishes a process for active allocation between credit and Treasuries based on credit spreads in the market and liability discount rates.

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Read our articles on Fixed Income and Liability Driven Investment.