Hedging the Interest Rate Exposure of Cash Balance Plans
For plan sponsors that have introduced cash balance plans as an alternative to more traditional defined benefit plans, the challenges of hedging the interest rate sensitivities that these plans introduce are complex but solvable.
The most used market benchmarks employed by pension plans are almost wholly inappropriate for cash balance plans and can potentially increase risk rather than reduce it. On this basis, the hurdle for introducing a customized liability benchmarked strategy is substantially lower than for traditional defined benefit plans. It is recommended that plan sponsors have a strong understanding of the unique market risk exposures cash balance plans present.
We continue to believe that setting explicit interest rate and credit spread hedge ratios for cash balance plans is appropriate, and in line with our previously released research.
An optimal strategy will involve a combination of credit assets to achieve the appropriate credit spread hedge (determined within a total portfolio context), Treasury securities and both long and short interest rate derivatives to match the specific key rate duration sensitivities of the cash balance plan.
Download the full article
Learn more about hedging the interest rate exposure of cash balance plans in this whitepaper.
Additional insights
Collectively Forecasted, Never Arrived
Investment Outlook | Q1 2024
Like driving on ice, the trick to surviving 2024 may be not over committing in one direction. Staying flexible at the beginning of the year should allow for more insightful decisions down the road.
Rethinking Overlay Manager Diversification
LDI
At LGIM America, we believe overlay manager diversification is likely inefficient and creates uncompensated risks. Using multiple overlay managers can result in increased costs, collateral inefficiency and higher governance burdens.
Views and opinions expressed herein are as of the date published and may change based on market and other conditions. The material contained here is confidential and intended for the person to whom it has been delivered and may not be reproduced or distributed. The material is for informational purposes only and is not intended as a solicitation to buy or sell any securities or other financial instrument or to provide any investment advice or service. Legal & General Investment Management America, Inc. does not guarantee the timeliness, sequence, accuracy or completeness of information included. Past performance should not be taken as an indication or guarantee of future performance and no representation, express or implied, is made regarding future performance.
Unless otherwise stated, references herein to "LGIM", "we" and "us" are meant to capture the global conglomerate that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) and Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser). © 2025. All rights reserved. No part of this publication may be re-produced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the publishers.