NEW YORK — Pension executives are catching on to what the money management community has been telling them for years: There's another benchmark in town, and it has nothing to do with any stock or bond index.
Liability-driven investment benchmarks, used to measure the growth of pension assets against projected liabilities, have been around for some time.
Now however, the Pension Protection Act of 2006, which implemented stricter funding rules, and expected changes to the Financial Accounting Standard Board's Statement 87, which is supposed to eliminate actuarial smoothing, have prompted more pension plans to at least consider using a liability-based benchmark.
Among funds using the benchmarks are the $10 billion World Bank pension fund, Washington, and the $6.9 billion pension plan of International Paper Inc., Stamford, Conn. The $4.1 billion pension plan of First Energy Corp., Akron, is looking at them.
In setting a benchmark to liabilities, plan executives can generally choose either a Treasury strip benchmark, which uses zero-coupon bonds to measure the general growth of liabilities, or an interest-rate swap benchmark, which uses the coupon rates of long-term, investment-grade bonds to measure the general growth rate of corporate pension liabilities.
Ron Ryan, president of Ryan ALM Inc., New York, was among the first to introduce liability-based benchmarks when he developed the concept of using a Treasury strip benchmark to measure liabilities in the mid-1980s. Nobel Laureate William Sharpe wrote about the liability-based benchmark concept in a January 1990 paper in the Journal of Portfolio Management.
Now, however, these benchmarks are being adopted either in place of — or as a supplement to — traditional performance-based benchmarks to measure total fund performance, according to money management industry executives.