Not All Liability Hedges Are Created Evenly: Guidance for US Plan Sponsors in Today’s Interest Rate Environment
In an era of historically low interest rates, heightened risk of yield curve steepening complicates pension risk management.
Authored by: Serge Agres
Liability Hedging in Response to Pandemic Crisis
The notion that interest rates are dynamic in nature and notoriously difficult to predict has been demonstrated in spades by the uptick in market volatility during the COVID-19 pandemic. The economic impact from the virus has been swift, creating a dichotomy between “risk-free” Treasury interest rates and corporate spreads. In this paper, we outline how hedging programs may need to re-align their strategies given the current circumstances while continuing to lean on the basics.
Liability-Hedging Strategies for US Plan Sponsors in the Low Interest Rate Era
As sponsors of US single-employer defined benefit plans know all too well, interest rates have experienced dramatic swings in recent years. While many plan sponsors have adapted to this environment by strategically hedging their liability interest rate risk, many are still questioning the efficacy of doing so—especially when interest rates appear to be low. Yet, failing to hedge long-duration liabilities with long-duration assets is a risky endeavor that exposes the plan sponsor to significant downside risk.
Should Corporate Plan Sponsors Continue to Hedge Liability Interest Rate Risk?
Yes, maintaining a well-hedged pension plan is prudent risk management.