Managing Pension Fund Liabilities

Terry Benzschawel

This article was first published as a chapter in Credit Modelling (2nd edition), by Risk Books.

De-risking pension liabilities and making up for liability shortfalls are important problems for many pension fund managers. In this chapter, these issues will be addressed using techniques developed in Chapters 5, 9 and 10 for estimating the credit risk premium and beating and hedging global credit benchmarks. That is, we present methods to match and outperform the spread return of the double-A rated corporate bonds that underlie the spread liabilities of the Citigroup Pension Liability index (CPLI). We begin by demonstrating, as we have for matching the investment-grade corporate risk premium in Chapter 10, how the five-year North American CDS index (CDX. IG.NA) can serve as a proxy for the spread portion of the double-A rated corporate bonds underlying the CPLI. That is, the credit spread return of the bonds underlying the CPLI can be reasonably replicated by selling protection on the CDX.IG.NA. The rationale for our approach, verified herein, is that the main drivers of monthly returns on the double-A bonds underlying the CPLI are fluctuations in the credit risk premium, and