The trend of US corporate defined benefit (DB) pension plans engaging in de-risking programs is firmly in place and a variety of factors have coalesced over the past ten-plus years which have guided plans to consider de-risking actions.
We examine the many ways equity risk in portfolios can be moderated. Instead of reducing the allocation to equities or re-allocating towards defensive equity, we examine the risk mitigation potential of applying a Put Spread Collar Overlay strategy.
- Multiple factors in pension plan management have emerged as catalysts to encourage the adoption of de-risking strategies.
- Additionally, the funded status of many plans is now at levels not seen in over a decade, reminding us of the need for caution.
- De-risking can take on many forms, from amending plan features to increasing allocations to fixed income, or even reducing plan liabilities by offering lump sums/annuities.
- Aside from reducing equity allocations, equity risk in portfolios can also be moderated by investing in defensive equities. Alternatively, implementing overlay strategies has the advantage of creating non-symmetric payoffs- a concept complimentary to the asymmetric nature of pension investing.
- Below, we examine the impact of applying a Put Spread Collar Overlay (“PSC”) strategy on the S&P 500 index and evaluate the impact of the strategy on criteria such as upside/downside capture, volatility, drawdown, periodic decline analysis as well as performance.
- Such a strategy can be incorporated into existing strategic asset allocations regardless of market conditions, potentially improving upside/downside capture, reducing volatility, and enhancing total return over a longer period of time.
