NISA Perspectives

If you would like to subscribe to NISA Perspectives, contact your client services representative or click here.

Perspectives

May 19, 2022

Stuck in the Starting Gate: 20y Treasury Futures Update

When the CME Group initiated trading on the new 20-year Treasury futures contract in March, we expressed cautious optimism that the new product would gradually develop liquidity to become another tool for hedging long duration interest rate risk. That optimism has been disappointing so far. It seems the 20-year contract never left the starting gate. After two months of trading…

May 5, 2022

The Disparity Among Risk Parity Managers: A Framework for Assessing Risk Parity Performance

Evaluating risk parity manager performance is complicated, so we set out to do it and did not find solid evidence of alpha for the cohort of managers. What we did find is a method for identifying what we believe is not only a more relevant benchmark for risk parity managers, but also an accessible investment solution that could be included as part…

March 31, 2022

A Potential New Tool in the LDI Toolkit

The CME Group launched a new product earlier this month — a 20-year Treasury futures contract. This follows the Treasury Department’s recent introduction of a 20-year bond, which has not gone as well as they had hoped. Once this long-duration Treasury derivative develops sufficient liquidity, it should provide liability-driven investors another tool to enhance the accuracy of their interest rate…

January 25, 2022

Standing Out From The Junk

If it wasn’t for the “high yield” classification or the less flattering term, “junk,” fallen angels (i.e., bonds downgraded below investment grade) may not need to fall as far. While high yield may seem like a homogenous asset class, upon further inspection fallen angels would stand out in a “high yield” crowd. While part of the high yield universe, these securities…

January 4, 2022

A Surprisingly Dull Update To Mortality Assumptions

In October, the Society of Actuaries (SOA) released mortality Scale MP-2021, giving us another opportunity to quickly reflect on the impact of mortality assumptions on pension valuation and management. For all points on this chart, we have modified our own input assumptions since our last SOA mortality scale update post to assume a 50/50 blend of male/female accrued benefits. We…

November 22, 2021

The Fall of Fallen Angels

On Dec 21st 2020, Tesla entered the S&P 500 with a market value of around $600 billion, representing ~1.7% of the index. Tesla became one of the five largest stocks by market value in the S&P 500. Newsworthy to be sure, but such transitions between indices due to eligibility are much more disruptive in the bond market. When a corporate issuer is downgraded…

November 19, 2021

Goods Prices Rise…For The First Time In 20 Years

Inflation has been a popular topic in recent client conversations, with good reason. Consumer prices are rising at the fastest pace since the early 1980s, raising questions about the path of monetary policy and the low-rate underpinnings of lofty risk asset valuations. As we first discussed last year, the pandemic recession uniquely targeted the services sector. The shift in consumption…

October 4, 2021

Getting Into The Right ZIP Code On Mortality Assumptions

NISA is excited to announce a collaborative effort with Club Vita to help plan sponsors get a better assessment of the impact of mortality assumptions on their pension plans. A formal press release on this will be issued in the next few days. This effort leverages the data and mortality analytics developed by Club Vita to allow NISA to perform…

August 5, 2021

Liabilities Take Center Stage For Some Multiemployer Plans

Executive Summary On Friday, July 9th, the PBGC released the interim final rules regarding the multiemployer Special Financial Assistance (SFA) program pursuant to the American Rescue Plan Act of 2021. As mentioned in a previous publication, the program provides much needed relief to multiemployer plans and provides greater benefit certainty for plan participants for years to come. For now, the…

June 8, 2021

95 is the new 105: Why plans should consider accelerating their glidepath

Increased funded status, newly legislated funding relief and historical contribution credit balances have created clearer skies and calmer waters for plan sponsors as we look forward over the next several years – from a contribution perspective. What a difference a year makes. On March 31, 2020, the average corporate pension plan’s funded status stood at 85%.[1] One year later, the…

June 3, 2021

Constraints on Labor Supply Should Prove Temporary 

Total nonfarm employment in the US remains 8.2 million workers below the pre-pandemic peak reached in February 2020 and yet pockets of labor market tightening are already appearing. As is the case with other resources in the economy, both the supply of and the demand for labor have been extremely volatile throughout the pandemic. In the last few months labor…

May 17, 2021

Much Needed Multiemployer Financial Assistance: But Don’t Count On 30 Years

Executive Summary The Special Financial Assistance (SFA) provisions of Sec. 9704 of the American Rescue Plan Act of 2021 (ARPA) provides a needed lifeline to many multiemployer plans facing insolvency in the coming decade. Eligible multiemployer plans will be able to apply for direct financial relief in the form of a single lump sum payment from the PBGC. The exact impact of…

May 4, 2021

A Different Perspective: A Humble Derivatives Lawyer’s

Uncleared Swaps Public Service Announcement PSA: If your Plan could have more than $8 billion in uncleared derivative notional exposure this PSA is for you! An important regulatory measurement period is fast approaching.  Uncleared Swap Initial Margin requirements are changing! Please pardon this unusual Perspectives post. Although we typically choose topics for NISA Perspectives that may be of interest to…

April 14, 2021

Phantom Jobless Claims Mask the Labor Market Recovery

We’ve written ad nauseum in these pages about the distorted and misleading economic data that have been produced during the unprecedented economic volatility of the pandemic. Despite turning a skeptical eye on hundreds of data releases over the past twelve months, we continue to find novel ways in which the data are inaccurate, often in material ways that undercut the…

March 30, 2021

The Strategic Case for High Yield in Hibernation and LDI Portfolios

NISA has consistently argued that risk assets play a useful role in end-state/hibernation portfolios, in moderation. While every hibernation portfolio needs to be designed based on its specific circumstances, a reasonable starting point to consider would be a portfolio comprised of 20% return seeking assets and 80% hedge assets – more specifically, 20% equity, 50% corporates and 30% Treasuries, designed…

March 9, 2021

Tantrum Without the Taper: FAQ on Recent Market Volatility

The recent volatility in bond markets has prompted quite a few inquiries from clients. Here we consolidate our thoughts on the most frequently asked questions. What exactly happened in the Treasury market last month? Treasury yields have been rising steadily since last summer but an important shift occurred in mid-February. Between August 1 and February 12, all 64 basis points…

March 1, 2021

What a Difference An Hour Can Make

Earlier this year, a change occurred with respect to fixed income security pricing that many service providers in the industry (e.g., custodians, recordkeepers, etc.) considered a relative non-event. However, the change actually has significant implications for managing fixed income against a chosen benchmark, portfolio valuation and manager evaluation. Specifically, on January 14th, Bloomberg Barclays changed the time at which it…

February 19, 2021

Another Extension of Funding Relief?

A few clients have asked us recently for our thoughts regarding the potential for additional funding relief for single-employer DB plans. While we certainly aren’t Washington insiders, our common reaction was that we did indeed expect relief because 1) relief provided under prior legislation is scheduled to begin phasing out this year, 2) rates are even lower now than they…

February 11, 2021

Longevity Assumptions – Don’t Let Them Kill You

Around the office, we have found longevity to be an engaging topic. A conversation about expected lifespans can quickly attract a small gathering of people observing and participating in the dialogue. Why? One answer is that it could be very primal – people are genetically programmed to think about survival, how long they might live, and what factors influence their…

November 19, 2020

A Conversation About The October Payrolls Report

Overheard on the NISA trading floor, Friday, November 6, 2020. Jess Yawitz: “Another strong payrolls report this morning, eh?” Stephen Douglass: “Yep, the jobs recovery continues to surprise to the upside. The details were even better than the headline figure too.” JY: “How so?” SD: “Well the headline figure showed a 638,000 gain in nonfarm payrolls in October but the…

October 29, 2020

Making Up Is Hard To Do: The Fed Adopts An Average Inflation Target Part II

In a post earlier this week, we explained how the Fed’s new flexible average inflation targeting (AIT) framework is motivated by a desire to prevent the zero lower bound constraint from de-anchoring inflation expectations to the downside. The logic of the new framework is intuitive. If the zero lower bound prevents the Fed from providing as much monetary stimulus as…

October 27, 2020

Making Up Is Hard To Do: The Fed Adopts An Average Inflation Target

In a landmark speech at the Jackson Hole conference in late August, Chairman Powell announced the first significant revision to the Fed’s operating framework since 2012. While the transition from a flexible inflation target to a flexible average inflation target might seem to be a subtle one, that may not move asset prices immediately, it does represent an important evolution…

October 20, 2020

Initial Jobless Claims Only Tell Half The Story, And It’s Not The Good Half

Regular readers will know we’ve been on somewhat of a campaign against economic disinformation this year, describing how data errors and faulty seasonal adjustments have been sending misleading signals about the true state of the labor market. Alas, we are called into action yet again. Every Thursday brings the release of jobless claims data. Like clockwork, the day also brings…

October 8, 2020

Service Required: The Unique Structural Impact of the 2020 Recession

The pandemic caused a recession unlike any other in American history. We’ve previously discussed the unprecedented speed of the shock itself and the policy response. The 2020 recession is also unique in the degree to which it has impacted service sectors of the economy. Financial economists are trained to closely monitor manufacturing and goods consumption because these tend to be…

October 5, 2020

A Very Normal World…of Interest Rates

Very little currently could be described as “normal,” but curiously (and perhaps surprisingly) we think interest rates have made the very short list of all things normal in 2020. In a recent Webinar, we discussed various market-based assessments of the potential future direction of interest rates. The data presented that received perhaps the most attention was the implied distribution of…

August 28, 2020

Progress

As we have been saying, the seasonal adjustment process for initial jobless claims has been wholly inappropriate given the scale of job losses during the pandemic. Because the process is multiplicative rather than additive, the adjustment factor has now inflated the actual claims numbers by over 4.6 million since March, grossly exaggerating the true magnitude of job loss. We’re happy…

August 19, 2020

Willing to Concede the S&P at 3750+? Equity Protection Strategies, Enter Stage Left

The combination of near all-time highs for the US large cap stocks and recent pricing of equity options at various strikes provides market participants with an interesting potential payoff profile over the next year. Specifically, investors can retain upside on the S&P 500 through 3,763, or 12.9% higher than its level at time of print, while securing a protection payment…

July 30, 2020

Seasonally Maladjusted: How Statistical Methods Have Destroyed 3.7 Million Jobs Since March

In this short note we demonstrate, primarily using a few examples and data points, how totally inappropriate it is to seasonally adjust initial unemployment claims during the pandemic and how doing so can lead to very misrepresentative “headline prints.” Why seasonally adjust claims? The purpose of seasonal adjusting is to remove distortions that result from holidays, plant re-toolings, retail sector…

July 16, 2020

The Siren Song of Manager Diversification

Recent market gyrations once again remind us of the importance of risk management in all aspects of an investor’s portfolio. One common risk management tool is the use of multiple managers in a given asset class, with the goal of manager diversification in mind. Yet, pervasive positive correlations among active fixed income managers’ excess returns can greatly diminish this diversification…

July 9, 2020

Labor Market Update: Objects in Mirror are Better than They Appear

The labor market continued its spectacular recovery in June. The jobs report released on Friday reflected a net gain of 4.8 million jobs, almost double the increase from May. The monthly change in nonfarm payrolls has set a record in each of the last four months: two record decreases followed by two record increases. The unemployment rate fell to 11.1%,…

July 2, 2020

The Dynamic Duo: Interest Rate Levels and Volatility

When volatility increases for a particular market (e.g., interest rates, credit spreads, or equity), the potential pain felt by the wrong move or satisfaction felt by the right move can be amplified. Over the last few months we have seen risk increase across a multitude of markets. Our last piece “Are Static Hedge Ratios Really Static?” focused exclusively on how…

June 15, 2020

A 10 Million Job Surprise

The May jobs report produced the biggest surprise we have ever seen from an economic data release. Nonfarm payroll employment increased by 2.5 million in the month, a full 10 million jobs higher than the Bloomberg median forecast for a loss of 7.5 million jobs. Not a single one of the 78 economists surveyed by Bloomberg predicted a positive number….

May 20, 2020

The Fed’s Crisis Playbook: Speak Softly and Carry an Unlimited Balance Sheet

COVID-19 has delivered an economic shock of unprecedented speed and severity. The Federal Reserve under Chairman Powell has responded with the most aggressive policy action in the central bank’s 107-year history. As well as cutting the policy rate to essentially zero and offering nearly unlimited repo financing, the Fed commenced on March 13, an asset purchase program of staggering proportions….

May 14, 2020

What a Difference a Decade Makes!

While the COVID-19 crisis is certainly new for everyone, heightened volatility, a declining equity market, falling rates and widening credit spreads are not.  So although funded status has fallen this time around, as compared to the Global Financial Crisis (GFC), plans have been better positioned to weather the storm. The NISA PSRX index is structured to estimate the average funded…

April 24, 2020

A Recession Unlike Any Other

The longest expansion in U.S. economic history ended in February. March ushered in a recession that will be unlike any other we have seen before. In the last five weeks, 26 million workers have filed for unemployment insurance. That’s more than the total number of jobs that were created in the entire decade-long expansion. The unemployment rate looks likely to…

April 7, 2020

Are Static Hedge Ratios Really Static?

Authors’ note: The timing of this piece may seem curious in these crazy times – specifically, a post that explores how “bond math” leads to increasing interest rate exposures in a low rate environment. We aren’t sure which reason is more appropriate to describe the timing; the fact that we started on this idea before the recent crisis or that…

March 24, 2020

Quick Post on Rebalancing

I know this is not the time for a long note on rebalancing theory and best practices. That said, current market conditions will make upcoming rebalancing challenging and expensive – maybe more so than at any time in memory. So here are the cold, hard facts. Each point has further detail below if you would like more details. Transaction costs in…

March 12, 2020

Treasury Yields: How Low Can They Go?

This has been a frequent question from clients in the past week as the spike in cross-asset volatility sent Treasury yields plunging to record lows. The shortest and most accurate answer is: nobody knows. Just as nobody could have predicted that a novel strain of an otherwise common virus would be the catalyst, or that an ascendant Saudi Arabian prince…

March 6, 2020

Coronavirus Fear Shocks Global Markets

Coronavirus has sent shockwaves throughout global financial markets. Since mid-February major global equity indices are down by 10-20%, investment grade US dollar credit spreads have widened by 30-50 basis points, and US Treasury yields have plummeted to all-time lows. The driving force behind this market turmoil is fear of the unknown. Nobody can predict how the virus will spread. Given…

December 18, 2019

Ignore Mortality at Your Own Risk

For the fifth year in a row, the updated Society of Actuaries mortality tables have reduced the size of pension liabilities: While this short note is becoming a little repetitive (as evidenced by our Groundhog Day movie reference from last year), it provides a good opportunity to highlight some key points about longevity. What can we conclude from the new…

November 18, 2019

State of the US Consumer in Four Charts

With no shortage of economic uncertainty in the world, it is natural to ask whether the US consumer can continue as the primary engine driving the expansion. Our answer to that question is yes. You’ve no doubt seen many of the well-known statistics describing today’s exceptionally strong labor market. The unemployment rate is at a 50-year low and there are…

October 9, 2019

FAQ: What Happened in the Repo Market Last Month?

A volatile September in the normally placid money markets inspired a number of client inquiries, and a few overzealous headline writers in the financial press. In this note we will review what happened, explain why we think it is more likely a technical disruption rather than an indication of broader stress in the financial system, and discuss steps policymakers may…

September 4, 2019

Monetary Policy in the U.S. is Being Determined by European (Japanese) Financial Markets

As we approach the next Fed meeting in September, expect more chatter on 1) whether they should ease and 2) what the inverted Treasury yield curve is saying about recession risk. Currently, the yield curve is shaped like a saucer. The highest rate is the 1-month bill, the lowest is the 5-year note, and the 30-year bond is only a…

August 21, 2019

Global Bond Yields Plunge to Record Lows

Bond yields have fallen dramatically around the world this month, driven by the latest escalation of the trade war as well as signals that aggressive monetary stimulus will be forthcoming from central banks. Longer-tenor government bond yields in the US and Europe have fallen by 30-60 basis points this month, reaching record lows for many sovereigns. While trade policy risk…

July 10, 2019

The Waiting is the Hardest Part: An Update on the LIBOR Transition

The LIBOR transition continues. As we have outlined in previous notes, we are six years into a global effort to replace LIBOR with more robust reference rates. Though progress has been made, we can’t say at this point whether the transition will be successfully completed before the end of 2021, the deadline after which UK regulators will stop requiring banks…

April 15, 2019

Two Alternatives in the End-state

Many plan sponsors find themselves in the fortunate position of approaching the end of their plan’s glidepath. Favorable market conditions and a contribution nudge from tax reform have made the end state appear on the horizon. This proximity to the finish line is certainly welcome and we expect plans are giving additional thought to what the end-state portfolio will look…

January 22, 2019

Investing in Alternatives: What’s Trending

While we have seen shifts from active to passive across public markets, most notably large cap U.S. domestic equity, the alternatives space has historically been insulated to this change. While this may remain true for a large portion of the alternative investment universe, we believe a development may be on the horizon; led by managed futures and CTA type strategies,…

January 3, 2019

Market Bids Farewell to the Fed’s Tightening Cycle

The last seven weeks have seen a dramatic repricing of the expected path of monetary policy. As recently as November 8, the fed funds futures market was pricing the Fed to hike all the way to 3%. Since then, more than two hikes have been removed from the expected path of policy. The fed funds futures yield curve is now…

December 21, 2018

Groundhog Day Meets Mortality Assumptions

Perhaps it would have been more fitting if the Society of Actuaries published their updated pension mortality improvement scale, MP-2018, on February 2. (For readers unfamiliar with the 1993 movie, Phil (Bill Murray) is stuck in a time loop, reliving one particular day – Groundhog Day.) By our estimates, the updated tables reduce the typical pension plan liability by about…

November 14, 2018

SOFR, So Good

The LIBOR transition continues. A global effort has been underway since 2013 to reduce dependency on LIBOR, the benchmark interest rate discredited by a series of manipulation scandals and long criticized for reflecting bankers’ estimates of their borrowing costs rather than actual transactions. US dollar LIBOR has grown since the 1980s to underpin $200 trillion in financial securities ranging from…

October 24, 2018

Implementing Your Beta

When envisioning any new strategy, it is human nature to skim over the details. Previous posts in this series outlined the strategic rationale and practical applications of a different way to think about and approach asset allocation. As sometimes happens, it is easy for the “what” and “why” of a new strategy to take center stage, while the operational details…

October 16, 2018

China, the Goliath of the Treasury Market

After the latest round of the trade war, China has imposed tariffs on nearly all of the $130 billion in annual goods imports from the U.S. Though China could increase the tariff rate, they have effectively spent all their ammunition in terms of the scope of tariff application. As China-watchers have speculated as to what other tools the Communist Party…

September 27, 2018

Small Balances, Big Bias?

Small balance annuity buyouts have been increasingly popular in the last few years – and for good reason. Given the fixed PBGC premium1 charged per participant, these participants represent the most costly balances for a sponsor to carry2. NISA’s position on annuity purchases has long been that they are better suited to serve cost management objectives than risk management objectives. Accordingly,…

September 25, 2018

Rebuilding Beta

In our previous post, we outlined a framework for evaluating asset allocation decisions and suggested that asset owners could enhance returns by separating investments into headline exposure (“overlay”) and committed capital (“underlay”) components. To better understand this approach, it may be helpful to provide some rationale of market drivers and explore some applications. It’s important to note that the practice…

September 7, 2018

Breaking Down Your Beta

Like visiting the doctor periodically, it is important for an investor to assess the overall health of her portfolio from time to time. At times, some of the most seemingly mundane parts of the checkup, for example a routine blood test, can be the most important and impactful. With that in mind, now might be a good time to revisit…

July 26, 2018

Separating Annuity Buyout Fact From Fiction

In recent weeks we have read a handful of commentaries suggesting that pension plans should take advantage of a “window of opportunity” to complete annuity purchases with insurance companies. They argue that plan sponsors should increase annuity purchases and offer lump sums and even consider fully terminating their pension plans. The unifying theme of these commentaries is that recent improvements…

June 19, 2018

Fed’s Technical Adjustment to IOER is a Sign of Things to Come

It was a surprise to no one when the Federal Reserve hiked rates this past Wednesday. The purpose of this note is to describe the “small technical adjustment” the Fed announced it would make to its operating framework for managing overnight interest rates. Since the financial crisis, the Fed has set the policy rate as a 25 bp range –…

December 29, 2017

A Small Lump of Coal in the Discount Curve

‘Tis the season for both giving and receiving, and for pension plans it’s been an especially great season for receiving. Since the beginning of the year, equity returns are up 15-25% and the average pension plan’s funded status is up 4-5%.1 At the risk of sounding like Scrooge, however, we wanted to highlight a small wrinkle in the liability discount rate…

December 18, 2017

Sharing an Interesting Analysis

Sometimes you come across a piece of analysis that is interesting enough to feel compelled to pass it on. I had this reaction while reading AQR’s recently published paper titled “The Illusion of Active Fixed Income Diversification,” which examined the excess returns of active bond managers and concluded that a majority of managers may be simply overweighting credit to produce alpha. Perhaps…

December 11, 2017

Anticipating the FIFO Rule

As the effort to reform the U.S. tax code speeds through the legislative process, it is clear that, whatever the specifics of the ultimate bill, it could have a significant impact on investors. Despite the bill’s fluid nature, there is one provision that could have such profound implications for taxable investors that we thought it was worth highlighting before the…

December 5, 2017

The Phillips Curve is Dead, Long Live the Phillips Curve!

The Phillips Curve describes the relationship between unemployment and inflation. First proposed in 1958, the theory holds that a low unemployment rate reflects a tight labor market that requires firms to raise wages to attract scarce labor. The Phillips Curve is therefore supposed to be downward sloping. Economists have since extended the model in a variety of ways: utilizing an…

November 2, 2017

Fed Takes First Step of $2 Trillion Journey

The Federal Reserve took the first step this week of what will be a long journey towards normalizing its balance sheet after buying nearly $4 trillion in securities from 2008 through 2014. The Fed had $8.7 billion in Treasury securities that matured on October 31. When those bonds matured, $2.7 billion was reinvested back into the five Treasury coupon securities…

July 28, 2017

The Beginning of the End for LIBOR

The end is nigh for the London Interbank Offered Rate. The CEO of the British markets regulator, the Financial Conduct Authority, announced yesterday that LIBOR will be phased out by the end of 2021. Though headlines proclaiming the “death of LIBOR” may catch some by surprise, this announcement is merely another step forward in a global process that has been…

May 25, 2017

Does the Size of a Company’s Pension Affect its Stock Price?

Summary We examined the statistics behind the claim that large pensions drag down a company’s valuation and accordingly how annuity buyouts allow a sponsor to remove this discount from their stock price. As you might have guessed, this conclusion rests on some erroneous assumptions and interpretations, and what makes for an exciting graph doesn’t quite translate into the real world…

May 19, 2017

Go Long!

The Treasury Department is considering issuing an ultra-long bond with a maturity greater than 30 years. The idea was first raised in post-election interviews with then-nominee for Treasury Secretary Steven Mnuchin and formalized last month when Treasury requested a response on the subject from primary dealers and the Treasury Borrowing Advisory Committee (TBAC). Both of these groups advised Treasury against…

March 10, 2017

Taking A Hike

It is a well-known market truism that the Fed tries to avoid surprising markets with its monetary policy decisions, especially when those decisions result in a rate increase. Indeed, the Fed has not issued a rate hike that was less than 70% priced in since 1994. On the other hand, the central bank has delivered a handful of rate cuts…

January 5, 2017

Trumponomics – Two Scenarios for Fiscal Stimulus

Changes in yields can provide insights into the market’s views on the potential results of anticipated policies of the Trump Administration. One of the more interesting dynamic relationships is that between TIPS and nominal Treasury yields, which offers guidance regarding real growth and inflation expectations. The graph below depicts changes in selected real and breakeven inflation rates (calculated as the…

December 7, 2016

Equity Spread Duration is Bubbling Up

Summary In recent months we’ve observed that equity’s effective spread duration (ESD) seems especially pronounced—for example, the S&P 500’s ESD is currently about 25 years vs. its ten-year average of about 15 years. We thought it would be worthwhile to dig a little deeper to understand this dynamic. In a nutshell, below average spread volatilities and above average correlations between…

December 5, 2016

A Strategy That Pays Dividends – Dividend Tilts in Taxable Insurance Portfolios

Taxable insurance portfolios can enhance returns by employing the tax code’s preference for dividends. By orienting their holdings toward equities that pay higher dividends, taxable investors can shift their total return to the more favorably-taxed dividend return component and away from the price return. The end result: after-tax alpha relative to a passively managed index portfolio.

December 2, 2016

Make Funded Status Great Again (Again)

The ongoing equity rally and the rise in Treasury yields prompted us to revisit this analysis. Between yesterday’s close (December 1) and November 10, when we originally calculated these estimates, the yield of the 30-year Treasury increased 15 bps while the MSCI ACWI climbed 0.3% higher. As a consequence, plan sponsors have likely continued to experience additional funded status gains…

November 11, 2016

Make Funded Status Great Again

It has been an interesting week. Regardless of your political leanings, Tuesday’s election seems to have already produced another unlikely winner: defined benefit plan sponsors. Between last Friday and yesterday (November 10), the yield on the 30-year Treasury increased 38 bps while the MSCI ACWI jumped 2.2%. This increase in rates and equity prices has boosted funded status, and some…

October 20, 2016

The Topography of Pension Risk

Last week, we participated in the annual P&I Pension Settlements Strategies conference. We will share the full materials in an upcoming post, but I thought one exhibit was worthy of special attention. One key point in our presentation was that pensions are not inherently risky. Rather, asset allocation drives the risk profile of the pension plan. Perhaps not an earth-shattering…

July 26, 2016

Grading Rates on a Curve

Can rates in the U.S. only go up from here? With Treasury yields reaching historical lows recently, it may be tempting to think of U.S. rates as having hit a floor. Yet before making tactical adjustments, it may be prudent to examine rates not just in absolute but in relative terms. Doing so suggests rates may not be as low…

June 29, 2016

Have Cash – Will Carry: Another Simple Strategy to Help Enhance Cash Yields

As the (seemingly) never-ending search for yield continues in year eight of the “low for long era,” an oldie but a goodie comes to mind. The cash and carry trade, which undoubtedly raises fond memories from your “Intro to Derivatives” course, has caught our eye recently. As a brief reminder, a cash and carry trade is when an investor purchases…

June 8, 2016

There’s Beta in My Alpha! (Part 2)

I received some feedback asking whether the high correlation of managers both to beta and to each other applies to “Aggregate” managers as well. As a brief follow-up to the previous post, I thought I would share results we obtained from the eVestment Analytics database of managers benchmarked to the Barclays Aggregate index. The bottom-line: Aggregate managers are even more…

May 20, 2016

There’s Beta in My Alpha!

When I was a kid, being called different never felt like a good thing. Fortunately, with age I have come to realize that sometimes being different is good. With that in mind, I share this post – warning, the following is as close to marketing as we will ever come! It should surprise no one that many active fixed income…

May 11, 2016

Bonds Without Borders

It may pay to be a little more cosmopolitan when it comes to your bond portfolio. Yield differences between comparable maturity instruments in different countries can offer opportunities to enhance returns, particularly for longer-term investors. By buying foreign bonds and using currency forwards to lock in future exchange rates, investors may be able to realize gains over what they could…

April 22, 2016

Prix Fixe vs. A la Carte (or, Asset Classes vs. Risk Premia)?

When you go to a restaurant for a nice meal, do you prefer to order from the prix fixe menu or go the à la carte route? With prix fixe, the chef has selected the entire meal for you, so you can be reasonably confident you’ll get something satisfying. But if you know exactly what you want to eat, ordering…

April 5, 2016

Long Corporates and Low Treasuries

We talk with a lot of pension plan sponsors who strategically want to hedge their liabilities by buying long duration corporate bonds but who tactically are discouraged from doing so by low long-term interest rates. In the past we have explored the idea of separating general interest rate and corporate spread exposures when hedging pension risk,* and given some recent…

March 29, 2016

Risk Premia Strategies – Beta Overlay 2.0?

The advent of investable risk premia indices brings beta overlay to a new level. These tools allow investors to adjust the pre-packaged factor weights of traditional asset classes toward a different weighting scheme based on priced factors and investors’ preferences. For some time now, investors have recognized that separating alpha and beta can be desirable. Because alpha is not equally…

March 9, 2016

NISA’s Target Date Glidepath – Designed for Retirement Security

The retirement landscape is shifting, as the workforce grows older and increasingly relies on its defined contribution plans for retirement security. NISA’s target date glidepath design seeks to manage risks that undermine the ultimate goal of retirement: sustainable and stable income. Our multi-asset and risk-controlled solutions can be employed in the design of your plan’s default option to help participants…

February 8, 2016

Rebalancing? Don’t Forget Derivatives

January’s steep drop in equity prices and rise in bond prices mean that many institutional investors are thinking about the same thing: rebalancing. With such a divergence in returns between equities and bonds, asset owners are understandably looking to get their portfolios back in line with their allocation targets. The problem is that not all asset classes are that easy…

February 2, 2016

Spending in Retirement: It’s Complicated

You may have missed that the Employee Benefit Research Institute (EBRI) released a study on retirement spending back in November.* The headline conclusion was that while spending in retirement tends to fall slightly over time on average, the spending patterns of individual retirees vary pretty widely. If markets don’t perform on average, and people don’t retire, spend, or live on…

January 11, 2016

Here’s an Idea to Potentially Enhance Your Cash Returns

Returns will be hard to come by in 2016. That is perhaps the least controversial prediction we can offer for the New Year. Though modest, we do have one suggestion for potentially improving an investor’s overall return: consider substituting Treasury Floating Rate Notes (FRNs) for T-bills/Short Term Investment Fund. FRNs have several features that make them attractive as cash equivalents….

January 4, 2016

The Great Migration Toward Fixed Income

Since the New Year is always a time for reflection, and we are pension geeks, we thought it would be interesting to take a look at how the biggest defined benefit corporate plan sponsors have shifted their plan allocations over the last decade. Using company filing data gathered for our Pension Surplus Risk Index, we can obtain a high-level estimate…

December 22, 2015

Brazil Downgraded to Junk—But It’s Not High Yield!

Brazil’s sovereign debt was recently downgraded below investment grade (IG). Before the downgrade, its index-eligible bonds were included in both the Barclays US Credit Investment Grade Index and the JPMorgan Emerging Market Bond Index, two of the more commonly followed indices. Beginning 1/1/16, these bonds will fall out of the IG index. What happens next is perhaps surprising. There is…

December 17, 2015

Live (Less) Long and Prosper?

Working in the pension industry, it can be confusing to know which side to root for when new longevity projections come out. And when the Society of Actuaries released new mortality projections in October1 that predicted lower life expectancies than previously indicated, our reaction was decidedly mixed. While as human beings hoping to live to a ripe old age this…

December 10, 2015

Fed Liftoff: More Questions than Answers

Markets are currently implying nearly an 80% probability that on December 16th the fed funds target range will be raised by 25 basis points. This expected increase will be the first rate hike since June 2006 – when a share of Lehman Brothers cost more than a share of Apple, and when a lot of today’s Wall Street traders were…

December 3, 2015

Our Take on Negative Swap Spreads

While the topic may not have come up at the Thanksgiving table, it’s one of the most discussed issues in the markets right now: why have swap spreads gone (so) negative? Ask ten people and you’ll get ten different answers—and ten different recommendations for what to do about it. Here’s the eleventh. In a nutshell, the fixed rate on long-dated…

December 3, 2015

The Full Picture on Partial Buyouts

We hear annuity buyouts frequently discussed as a silver bullet to reduce pension plan risk. Whether buyouts are the right de-risking option was the main topic at the October Pension & Investments’ Pension Settlements Strategies Conference, which we cosponsored for the third year in a row. Judging by the interest we saw at the conference, plan sponsors are engaged and…

November 9, 2015

The Full Picture on Partial Buyouts

Plan sponsors may be disappointed if they expect to eliminate most of their pension risk with a partial buyout. Unless a buyout is paired with a hibernation strategy, the sponsor may spend time and money arriving at an outcome that leaves a lot of pension risk unmanaged. A hard look at these different de-risking strategies suggests that the lion’s share…

May 7, 2015

Regulators Pave the Road to Retirement Income

We’ve witnessed a flurry of new guidance and regulations from both the Department of Treasury and Department of Labor related to retirement income. The growing retirement crisis has employees, employers and the government recognizing that this shared concern needs shared solutions. Washington has shown its focus on removing barriers and fostering adoption of retirement income solutions. As employers increasingly seek…

March 6, 2015

Credit Where It’s Due

When de-risking with liability driven investing, pension plans must decide on the right blend of corporate bonds and Treasuries to hedge their liabilities. We look at the forces that can drive this decision and find that the mix of hedging bonds depends on changing market conditions. Plans should periodically examine their liability hedging portfolios and be aware of the opportunities…

December 10, 2014

Pension Buyout Reality Check

Recent annuity purchases highlight the need to examine what drives their pricing. Plan sponsor announcements that allude to “par” settlements relative to accounting values warrant a closer look at the plan’s actuarial assumptions before reaching any conclusions about the attractiveness of a buyout’s economics.

December 3, 2014

The Beauty of the Bundle

DC participants want the most for their money when choosing a retirement income strategy. While annuities can offer higher income, that value is partially reduced by expenses and the loss of control and liquidity. We quantify these drawbacks and find that the most efficient way to fund retirement spending may be to combine a longevity annuity (e.g., QLAC) with a…

September 19, 2014

Long Live Longevity Annuities

DC plans can now offer deferred “longevity” annuities that provide income in the later years of retirement. This is good news for those participants who want the peace of mind that they won’t outlive their assets while retaining control over most of their portfolio.

July 31, 2014

The Long View on Short Rates

Since the 2008 financial crisis, the market has suggested a rapid rise in short-term rates to a higher equilibrium level. And while that future equilibrium yield has fluctuated between 4-5%, it is currently at the low end of the range. Will the market’s expectations about future interest rates continue to bounce around or is this a signal about lower interest…

May 16, 2014

Refocusing on Retirement Income Risk

Fixed income allocations in defined contribution plans, while perceived as low risk, may actually expose participants to substantial volatility in retirement income. To reduce this risk, sponsors can apply duration-matching techniques when designing target date funds or managed accounts. This offers participants stability in their retirement income expectations and customization to better reflect plan demographics.

May 8, 2014

Spreading Confusion

We have observed (with some bemusement) how the financial media often compares the yields on different countries’ debt without adjustment for the different currencies in which the debt is denominated. By overlooking a currency adjustment, investors may get a distorted risk-return picture when comparing sovereign bond yields.

February 18, 2014

Cash on the Barrelhead

LDI hibernation strategies may present an opportunity to de-risk at a lower expected cost and on a more flexible contribution schedule than annuity buyouts. Additionally, plans that have not yet de-risked may be surprised by how little their equity allocations reduce expected contributions, and how much contribution volatility they may generate.

August 12, 2013

At the Crossroads

Many pension plan sponsors and fiduciaries are confronting perhaps the most important decision in the plan’s life – whether to pursue an internal de-risking strategy or pay an insurer to offload the liability. We highlight some key considerations for those faced with this choice, and explore the components of the amount a sponsor may pay in a buyout transaction.

April 30, 2013

Putting Longevity Risk in its Place

Pension plans run the risk that actual beneficiary lifespans can exceed those assumed in their liability projections. We estimate the risk to be about 0.4% annually in funded status terms. While longevity risk should not be ignored and can be managed, it is small relative to the market risks embedded in a typical plan’s assets and liability.

March 20, 2013

Contribution Relief with a Catch

At first blush, MAP-21 would appear to make pension plan contributions less likely in the near term. However, it also makes pension deficits more expensive by hiking the PBGC’s underfunding charge (the variable rate premium). The rise to nearly 2% on each dollar of deficit may encourage sponsors to voluntarily fund their plan even if not required to do so…

January 30, 2013

Defining the Pension De-Risking Spectrum

Pension de-risking need not be an all-or-nothing decision. In fact, plan fiduciaries may be surprised by the degree to which pension risk profiles can be changed – marginally or materially – through asset allocation decisions and liability-driven investment (LDI) techniques. While annuity buyouts define the end point of the so-called de-risking spectrum, fiduciaries should compare them to other “hibernation” approaches…

January 6, 2013

The Credit Rating Impact of Pension De-Risking

By simply de-risking their pension plan, companies can realize most of the benefits of annuity purchases without incurring the upfront liquidity costs or committing to an irreversible decision. Along with the reduction in pension volatility, de-risking should improve credit ratings for some companies with large pension plans relative to their core businesses. The desire to de-risk pension plans is understandable…

November 27, 2012

Efficient Tax Management in Taxable VEBA Portfolios

Reducing tax consequences in equity portfolios offers tangible benefits in the current tax environment. Three key decisions that directly influence the after-tax performance of such portfolios include 1) portfolio dividend tilt, 2) portfolio turnover, and 3) capital gain/loss realization. Each of these decisions should be evaluated in the context of tracking error versus the desired benchmark and could ultimately affect…

October 11, 2012

Funding Relief and Implications for Pension Investing

The recently-passed Moving Ahead for Progress in the 21st Century Act (“MAP-21”) provides temporary funding relief for corporate defined benefit plans. In this piece, we explain how the legislation effects regulatory discount rates and review the impact of MAP-21 on a hypothetical plan’s PPA reported funded status and required contributions. We further investigate what, if any, impact the legislation has…

September 26, 2012

PSRX Overview

NISA’s proprietary Pension Surplus Risk Index (PSRX®) and supplemental data offer plan fiduciaries a means of monitoring plan funded status volatility and the ability to compare the levels of risk in their plan to the overall defined benefit universe.

September 26, 2012

PSRX Guide

August 15, 2012

Corporate Bond Scarcity? The Case for Separating Interest Rate and Spread Risks

U.S. pension plan demand for long duration corporate bonds has been and is expected to remain at a high level. Nonetheless, some sponsors have delayed implementing strategic corporate bond programs because of tactical views on Treasury yields. Given the ease of managing Treasury duration, this need not be the case.

October 5, 2011

Prospective Funded Status Volatility

Negative performance of risk assets, coupled with lower interest rates, has had the obvious effect of reducing funded status for most corporate defined benefit pension plans. Though perhaps less obvious, higher prospective volatilities have implications for both asset allocation and interest rate hedging strategies.

August 2, 2011

Break-even Yield Curve

Like any market, timing interest rates is challenging. This brief addresses one key, and often overlooked, aspect of interest rate levels – specifically, rate changes that are currently priced into the market.

July 31, 2011

Dynamic Liability Driven Investing

Pension plans have used Liability Driven Investment (LDI) strategies for years. In this brief we introduce a more comprehensive platform: Dynamic LDI. The improvement Dynamic LDI offers stems from the relationship between funded status and asset allocation. The central tenet of the strategy is the “dynamic” reduction in risk as funded status improves.

May 27, 2009

Interest Rate Hedges

Interest rate markets have experienced pronounced volatility in recent years. Many pension liability hedge strategies that relied heavily on derivatives and Treasury bonds outperformed changes in reported liabilities. The question that arises is: Are strategies that utilize interest rate swaps still effective at reducing the Plan’s funded status risk?

December 18, 2008

Considerations Surrounding Corporate Bonds in Pensions

Widening credit spreads increases focus on the suitability and attractiveness of corporate bonds as pension plan investments. This paper examines one aspect of these issues – reducing funded status volatility by better matching the sensitivity of the liability’s discount rate to credit spreads using corporate bonds.

NISA Investment Advisors, LLC is an independent, employee owned investment management firm. We focus on risk-controlled asset management for large institutional investors.

Content © 2008–2022 NISA Investment Advisors, LLC.

NISA Investment Advisors, LLC
101 South Hanley Road
Suite 1700
St. Louis, MO 63105-3487
P: 314.721.1900
F: 314.721.3041

Agree to Terms

Please review and accept the following to proceed.

I have read and agree to the Terms of Use, Disclaimer, PSRX Disclaimer, and Privacy Policy. I am either (i) an investment professional and an employee of an institutional investor, or a consultant to an institutional investor, or (ii) an employee of, or a student in, an institution of higher learning and I am involved in the study, research or teaching of subjects related to investments, finance, or economics. I reside in the United States or Canada. I understand that the information is not and should not be regarded as investment advice or as a recommendation regarding a course of action.

By clicking “Accept” below, you hereby acknowledge, understand and accept the foregoing.