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IPE special report May 2018

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SSGA suggests benchmarking against liabilities

UK - State Street Global Advisors has suggested that pension fund benchmarks should be related to a scheme's liabilities and solvency.

The comments follow a poll by Mercer Investment Consulting earlier this month, which found that UK investment managers were open to the idea of using liability benchmarking.

"A benchmark that is related to the actual liability of the fund is, in our view, worth consideration," says Matthew Crawford, investment manager, global fixed income at SSGA.

But he says there are obstacles which make an exact match difficult to achieve – such as the difficulty in obtaining accurate predictions about liabilities and matching the forecasted liability with a typical coupon paying bond portfolio.

He argues that pension fund portfolios "should be designed to best deliver high and stable surplus values".

He cited academic research whereby the liability is seen as the risk-free asset. He explains: "It follows that the liability should form the base for the benchmark."

"We believe that the pension liability profile looks far more like a bond than an equity portfolio return stream. With this is mind a greater allocation to bonds should provide greater stability for the surplus."

He said derivatives, in the form of strips or interest rate swaps, can play a role in matching the liability profile. He added that the asset allocation of a scheme should be linked to the surplus or shortfall of the pension fund.

"What we do believe is that more consideration towards the choice of the neutral position adopted by pension funds is required.

"Why should the benchmark be driven by market capitalisation? Why should the asset allocation be based off outdated assumptions of market returns?

Mercer had found that almost 75% of the respondents to its poll said they would participate in liability-benchmarked mandates.

SSGA is the ninth largest manager of European pension assets, with around 49 billion euros of such assets under management.

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