Pi2Resource Introduces Pension Liability Allocation as New Pension Metric for Liability-Driven Investing


PHILADELPHIA, PA - September 13, 2006 - Pension, Investment and Insurance Resource, LLC (Pi2Resource) introduced its proprietary pension metric, Pension Liability AllocationTM, to assist plan sponsors in accurately measuring investment risk. Pension Liability Allocation also serves as a natural implementation framework for liability-driven investing.

Pi2Resource released two white papers "Pension Liability Allocation 1: Quantifying Asset / Liability Mismatch Risk" and "Pension Liability Allocation 2: Implementing Liability-Driven Investing" explaining the new concept. Both white papers and an executive summary ("Ten Risk Management Lessons from Pension Liability Allocation") are available from Pi2Resource's website (pi2resource.com).

With the heightened interest in risk management arising from the painful experience of the so-called 2000-2002 "Pension Perfect Storm", plan sponsors are seeking effective means of measuring their current risk profile as well as evaluating the potential risk impact of various investment strategies offered in the market. This need is further exacerbated by requirements mandated by the Pension Protection Act of 2006 and FASB reform, both of which point to increased pension volatility. "Traditional pension risk evaluation involves a multitude of numbers that are often difficult for plan sponsors to effectively integrate," said Antonio Tan-Torres, Pi2Resource Managing Partner. "Besides the plan's funded ratio, the plan's asset allocation is arguably the only risk indicator most plan sponsors would know off the top of their heads. Unfortunately, asset allocation clearly has some shortcomings as the primary risk metric."

While asset allocation is strictly an asset-side metric, pension liability allocation has the advantage of encapsulating the liability and surplus side of the pension equation, in addition to the asset allocation. "Knowing only that two different plans have the same 60/40 stock/bond asset allocations, one cannot distinguish the riskier plan," said Tan-Torres. "However, the plans' pension liability allocations would vary due to different liability characteristics and funded positions between plans. As such, one can readily ascertain the riskier allocation."

"Pension liability allocation allows the plan sponsor to understand the combined impact of allocating assets to fixed income and setting the duration of the fixed income component to durations less than, equal to or greater than the liability duration," added Dick Wendt, Senior Advisor for Pension Finance.

Pension liability allocation can also be used in reviewing current or alternative investment policies, including interest rate swaps, derivative overlays and other liability-driven instruments. "The impact of an interest rate swap on pension surplus volatility can readily be quantified by comparing liability allocations before and after the swap overlay. At a minimum, plan sponsors should know and understand the associated pension liability allocation of their current investment policy," noted Tan-Torres.

For more information on pension liability allocation, visit the Pi2Resource website at pi2resource.com.