NEW YORK — Investment banks are pitching corporate chief financial officers, treasurers and chief investment officers on complex solutions to their pension plans' unfunded liabilities
Many of these solutions involve derivatives; all seek to deliver additional alpha and align pension assets and liabilities.
The brokerage units at investment banks stand to gain from providing these investment solutions, which include using interest rate swaps to synthetically increase the duration of a plan's bond portfolio in order to align assets to liabilities, using futures and total return swaps in portable alpha strategies to synthetically gain exposure to a certain index, and overlaying a plan's equity portfolio by writing call options to beef up returns.
Merrill Lynch & Co., New York; JPMorgan Chase & Co., New York; and Morgan Stanley, New York, are among the big investment banks placing greater emphasis on providing investment solutions to corporate pension plans and their consultants. One part of the approach of some of the firms is to create the position of pension strategist or new product development specialist to help educate corporate financial executives about these new strategies.
"Both myself and the treasurer are getting more pitches from investment banks as we have become more sensitive to liability risk," said one executive who helps oversee a $4.2 billion corporate pension fund. (He and other corporate executives contacted for this story would not allow their names to be used.) "They have mostly pitched derivatives strategies. We use some swaps to overlay a small portion of our bond portfolio. I don't really mind (getting pitches from investment bankers). Basically, as plan sponsors, we need to take the time to really understand these strategies and the fees from them."
The chief investment officer at a $7 billion corporate fund said the number of pitches from investment banks has increased since the tech bubble burst in 2000. "They are really pushing the use of derivatives," he said. "They are not bad strategies; we're currently talking to investment banks about using rate swaps to increase the duration of our bond portfolio.
"Both the chief financial officer and I understand these strategies and the costs associated with them, but I could see how some corporate plan sponsors might not."