Many corporate defined benefit (DB) plans are revisiting their liability-hedging allocations and assessing new derisking ideas. As we discuss in part one of this paper, our core philosophy for constructing liability-hedging benchmarks remains unchanged. We continue to believe that thoughtful customization tailored to the liability’s key risk drivers goes a long way, but that attempting to perfectly match liability characteristics, especially across the yield curve, can result in unnecessary complexity and costs without a meaningful reduction in funded-ratio volatility.
At the same time, we believe there are a number of opportunities to enhance traditional liability-hedging benchmarks by capitalizing on recent market developments and preparing for the likely effects of future demand in the long-duration fixed income markets. In particular, part two of this paper highlights our research on several allocations that may complement long-duration corporate bonds, including long-duration securitized assets, intermediate corporate bonds, and return-seeking fixed income.
Part one: Our core philosophy for liability-hedging benchmark construction
While every plan has a unique cash flow and demographic profile, we’ve found that traditional (e.g., final average pay) pension liabilities are most sensitive to changes in a few key risk metrics. Specifically, we believe most plans can seek to minimize funded-ratio volatility by managing liability-hedging portfolios benchmarked to a blend of…
To read more, please click the download link below.
