Institutional investors are rediscovering that pension liabilities are just as important as assets.
General Motors Corp.'s $86 billion pension fund has adopted a liability hedging strategy, though W. Allen Reed, president and CEO of General Motors Asset Management, New York, declined to provide further details.
According to one source, however, the strategy was implemented by midyear — just before the long bond interest rate declined. The effect was to boost pension fund returns in the third quarter, the source said. The strategy coincided with a major push into alternative assets by GM pension executives. Spokesman Jerry Dubrowski said the fund returned 6% in the first nine months of 2004, up from about 3% in the first half of the year.
Executives at other pension funds are looking closely at the subject, including Robert Hunkeler, vice president-investments at International Paper Co., Stamford, Conn., which has a $6.5 billion defined benefit plan.
"The assets that we use do not track the liabilities very well, and therefore, can you find a strategy that can do a better job of asset-liability matching?" Mr. Hunkeler said.
One option now on the table: using derivatives to extend the duration of the fund's $1.4 billion long-bond portfolio, which already has a duration of 10 years. The fund's average duration is about 12 years, he said.
The bear market of 2000 to 2003 and the concurrent drop in interest rates hit pension funds with a double whammy, generating the most interest in asset-matching strategies since the 1980s.