Asset Liability Matching

Employers with pension plans that were adversely affected by the downturn in 2009 are looking for ways to recover and develop a risk reduced portfolio.

You have plenty of risk in your business. Why spend your risk budget on the company pension plan?

Example: In 2005 a Company’s Pension Plan was underfunded, hit by prior market downturns. They wanted to put money into the plan to get the right amount of funding, and they wanted it to stay there. They were invested 60% equity and 40% fixed income.

Asset Liability Matching is a risk reduction strategy which looks at cash flow from the current time, and matches the current payments as far out as possible. To help with these types of scenarios, the Actuary provides the strategy and the expected benefit payments calculations using the plan assumptions. Typically the company has an investor in place. If not, the Actuary may offer suggestions for someone who focuses on this particular area of investments.

In this example, the recommendation was to buy bonds to make these payments, with 85% in Treasuries because they are more actively traded, leaving 15% in equities.

Here is how the client solved the risk of their 2013 benefit payments:

2013
Expected Benefit Payments	$122,333
Face Value Purchased	$125,000
Cost	$ 94,330
Maturity	11/15/2012
Description	Zero Coupon @ 4.69%

Here is how the Company’s funded status improved as a result of the strategy:

Date	Funded Percentage	Discount Rate	30 Year Treasuries
3/31/2006	70%	6.0%
3/31/2007	77%	5.9%
3/31/2008	86%	6.1%	4.39%
3/31/2009	100+%	7.4%	3.64%

Should I implement the strategy today?

Why would I want to buy bonds now? When the interest rates go up, the bond rates go down and so does the liability (present value of the future payment). If interest rates go down, the bonds increase in value to cover the increased liability. You have locked in coverage of the future benefits and taken risk out of the equation. Interest can fluctuate and it will not affect your plan.

John Markley