SSGA unveils “dynamic risk” model for DB schemes
GLOBAL – State Street Global Advisors has unveiled a new strategic asset allocation product for defined benefit pension plans that it says will provide an investment “roadmap”.
SSGA said its ‘Dynamic Risk Allocation Model’ – available as a turnkey service as an overlay to an existing investment strategy - sets a strategic allocation policy that determines the response of a DB plan’s asset mix to market changes.
It said it allows plan sponsors to “directly manage assets relative to projected liabilities, and permits the fund’s asset allocation to shift in response to changes in value (funding ratio) and in risk premia”.
“Our new solution offers pension funds a better strategy with which to manage projected liabilities and market risk,” said Tony Foley, managing director of SSGA’s Advanced Research Centre in a statement.
“With DRAM, a plan sponsor will essentially have an investment roadmap that establishes in advance how the strategic allocation should vary with changes in expected returns, wealth levels and degree of risk aversion in order to best meet the objectives of the fund.”
The product would “build from” the client’s liability profile, the statement said. “SSGA will work with the pension plan and its consultant to determine a dynamic risk budget which will define a client’s tolerance for market risk as wealth and risk premia change.
It added that SSGA’s role “complements that of the consultant (or plan actuary)” who performs the liability work, the hiring of investment managers, and provides on-going monitoring of all strategies and managers.
“We’re certainly not looking to displace consultants,” Foley said in a phone interview. “What we’re trying to do with this product is opportunity to bring it all together.”
“By starting with the liabilities and adopting a strategic policy, a plan sponsor will be able to focus on changes relative to the projected liabilities of the fund, rather than focusing on measuring everything relative to the traditional strategic benchmark,” said Alan Brown, SSGA’s group chief investment officer.
He added: “The separation of a plan’s alpha and beta investment strategies can also be more easily achieved and, for the first time, a plan’s surplus position can be directly managed.”
Foley said the product was “a client-driven thing” and represents a “product you can actively employ”.
He added that changing accounting standards – notably IAS19 – would make the need for a product like this “more apparent" due to the impact on the balance sheet.
And he said that SSGA may even be asked to take over the entire management of small DB schemes. Fees would be “extemely competitive”.