UK - State Street Global Advisors is backing calls for liability benchmarks rather than the current practice of measuring performance against indices.
The firm believes the present system for setting mandates and asset allocation using long-term return assumptions is wrong.
And it wants the fund management industry to put together liability mandates that can match scheme cash-flow requirements, while producing excess returns.
One approach that SSgA is recommending is for clients to match their liabilities for a certain period of time with bonds, and invest the rest in equities – or other asset classes with higher long-term expected returns – and use overlay strategies to maximise returns.
It claims this approach would work equally well for schemes whether they were in surplus or deficit, as it would protect investors’ money while achieving positive returns.
SSgA investment manager, global fixed income, Matthew Crawford said: “This approach ensures that risky higher return assets can be included in the portfolio with the assurance that the imminent cash-flow requirements are met.
“The greater the breadth and diversity of alpha sources, the greater the chance of consistently adding value. The fund manager’s interests should be more directly linked to those of the pension beneficiaries and setting a benchmark that relates to the liability profile and solvency of the plan does exactly that.”
Merrill Lynch Investment Managers managing director, institutional clients, Andrew Dyson agreed. But he stressed greater clarity was needed over the practice of liability mandates.
He said: “Everybody increasingly agrees that having mandates that target clients’ liability objectives is a good idea.
“What’s critical is what this actually means in practice. If you are going down that route, as a client you need greater clarity about what this entails. There’s not much point in being very precise on matching one part of the liabilities and still running a reasonable degree of risk on the other part – this smacks of over-finessing.”
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