Managing Capital Market Risk for Retirement
Date of this Version
We offer an overview of solutions available to pension plans to manage capital market risk in order to meet their obligations. We outline the main drivers behind the evolution of asset-liability management (ALM) for pension plans and the emergence of liability-driven investment (LDI) in the last decade. We look at some of the most popular pension de-risking tools and at recent innovations prompted by the Global Financial Crisis. We offer examples based on the rise of cross-asset correlation, the use of hybrid products to mitigate tail risk, and the increasing relevance of counterparty risk mitigation tools such as collateralization. We conclude by outlining some of the main challenges ahead, including developments in pension regulation, centralized clearing of over-the-counter (OTC) instruments, and risk taking incentives in delegated asset management for long term retirement obligations.
pension liabilities, liability-driven investment, cross-asset correlation, collateralization, pension buyouts, over-the-counter OTC instruments
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All opinions, errors, findings, interpretations, and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2013 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 26 June 2019