Innovative strategy for reducing pension fund risk
Last week CF reported on how CFOs are becoming increasingly preoccupied with their company pension plans. A new vehicle launched today aims to help trustees and fund managers reduce inflationary risk.
State Street Global Advisors, the investment management arm of State Street Corporation and the largest institutional fund manager in the world, announced today the launch of its Pooled Asset Liability Matching Solution (PALMs). PALMs enables pension funds to match their projected future liabilities within different inflation environments using a flexible and cost-effective pooled vehicle.
New regulatory and accounting changes have prompted U.K. pension funds to put more focus on matching the liabilities in their funds and as a result, many have increased their allocations to conventional and index-linked gilts to reduce risk. But due to the scarcity of long-dated gilts, there is often a mismatch between a fund's cash flows and the liabilities, which in turn results in inefficient portfolio risk budgeting. Changes in inflation further compound the problem.
With PALMs, State Street Global Advisors has created a highly effective solution to address the real-world needs of pension funds. The new product provides access to nine pooled funds holding different maturity Limited Price Inflation swaps (LPI, or inflation-linked securities) to protect assets and preserve pensioners' purchasing power in both high and low inflation environments.