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Inventive Strategies for Managing Corporate Pensions Risk

Reduce pensions risk and maximize shareholder value

The current environment is challenging pension sponsors to design inventive strategies of managing corporate pensions risk. In the last year, we've uploaded some great research which addresses pensions risk in different ways. There are plenty more white papers covering corporate pensions risk on our site, but here are some of the best:

Bungee Jumping river below Pensions Risk

LDI Implementation - Managing Surplus Volatility by Reducing Drawdown Risk (QMA)
Market and regulatory changes are challenging corporate pension plans to find inventive ways to manage the health of their plans and drawdown risk. This paper by QMA recommends that plan sponsors prioritize the trade-off between surplus volatility and funded status, and examine their growth assets for ways to reduce surplus volatility.

Pension Sponsors: Don't Forget the Credit Spread! (Cambridge Assoc, Oct 2016)
This paper by Cambridge Associates explores interest rate risk within plan sponsor's DB plans, a complex and important issue few fully appreciate.

2016 KPMG Survey of UK Liability-Driven Investing
The UK LDI market continues to grow strongly, with over £741bn of liabilities now believed to be hedged across the industry. KPMG has produced this definitive survey of the UK LDI marketplace, revealing that an additional 256 LDI mandates were deployed in 2015.

Reducing Pension Risk: Five Myths Holding Back U.S. Plan Sponsors (Prudential, 2016)
The UK has led the way in pensions risk transfer, and the trend is now going global. By transferring longevity risk to insurers, pension plan sponsors can both strengthen their own financial stability and also improve the financial security of retirees. This 16-page report from Prudential discusses the global marketplace for longevity risk transfer, examining individual transactions and exploring the process for determining the optimal solution for an individual fund.

Corporate Pension Risk Management and Corporate Finance: Theory and Practice
This report by the Society of Actuaries asks some key questions: How does a company's pension plan affect the stock price? How does the pension plan impact the company's credit rating / credit spread? How does a US company manage its pension liabilities in the light of pension insurance ( i.e. the Pension Benefit Guaranty Corporation)?

Mercer Global Pension Buyout Index 2016 (Sep 2016)
This index examines trends in the pricing of bulk pension annuity transactions in the UK, US, Canada, Ireland, the Netherlands and Germany. Increasingly, pension risk transfer transactions involve an international element. Pricing is subject to domestic requirements for insurer reserving and international financial markets.

A question for DB plan sponsors: To LDI or not to LDI (Vanguard, 2016)
This paper briefly compares the experiences of two different defined (DB) clients. One client chose LDI and the other, having initially considered LDI, decided not to adopt it. Philip C. Daubney compares these two experiences in both rising and falling rates environments, and both strong and weak equity markets. He considers the effects of the actual market environment not just on assets, but on the funded status of the plans.

UK Pensions De-Risking Report 2016 (Willis Towers Watson)
Currently, only £150 billion of an estimated £2 trillion of UK DB pension liabilities have hedged longevity risk. More and more schemes are starting to consider a de-risking journey and how to manage risks. This report by Willis Towers Watson shines a light on current market activity. The authors also share their expectations for the future.

Borrowing to Fund Pensions Could Enhance Shareholder Value (Prudential, Oct 16)
This paper by Prudential examines the borrow-to-fund strategy. It discusses the risks but argues that is overall, the strategy is beneficial to a wide variety of plan sponsors: large or small, with frozen or ongoing plans.

Devices to Exploit Surpluses and Shed Deficits in UK Pension Schemes (2016)
This paper gives examples of UK DB pension schemes suffering losses in the 1980s and early 1990s (mostly by fraud or questionable practices). It then discusses a number of strategies proprietors can use to shed or avoid scheme deficits.

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