A new book intended for chief investment officers provides a road map to managing defined benefit pension assets, liabilities and their risks more effectively, including taking contrary approaches to current practices in rebalancing, liability-driven investing and rewarding external managers.
For CIOs, the true objective in pension fund management is the measure of asset return relative to liability, not investment performance alone, writes Arun Muralidhar, author of “A SMART Approach to Portfolio Management.”
In the 191-page book, newly published by Royal Fern Publishing LLC, Great Falls, Va., Mr. Muralidhar says, “CIOs must track annualized growth in the (pension plan) surplus, defined as the difference between the annualized return on asets minus the annualized return on liabilities.”
The true measure of return for pension funds “is not absolute asset returns, but rather return relative to liability,” he writes.
“The principal challenge in developing an optimal policy for managing the assets-to-liabilities ratio, called the funded ratio, has more to do with understanding liabilities than developing innovative investment policies,” writes Mr. Muralidhar, who co-authored the 2004 book “Rethinking Pension Reform” with Nobel economics laureate Franco Modigliani.
But Mr. Muralidhar acknowledged asset and liability management is not well integrated in pension plans.