Grappling with the difficulties posed by long-term interest rates, pension funds are getting some help from manufacturers.Earlier this year, Standard Life launched three target liability bond funds to help defined benefit pension plans deal with interest rate risk. The insurer has already raised $50 million in assets in February with three clients, including CCH Canadian and Cytec Canada.
The new products are aimed at small and medium-sized pension plans, those with liabilities between $20 million and $100 million, says Marc-Antoine Morin, an actuary and senior advisor for product development and management at Standard Life. The three funds are managed by the insurer’s subsidiary, Standard Life Investments Inc.
These three funds are designed to fit in with a pension fund’s demographic profile. Standard Life’s long-term liability government bond fund is aimed at a demographic profile made up mostly of active employees, with a duration of 18 years. The mid-term liability government bond fund is for a demographic profile made up mostly of retirees, with a duration of 13 years. The one designed for short-term liabilities is meant for a demographic profile made up entirely of retirees, with a duration of seven years.
“Companies can choose the one that best matches their plan’s demographic profile or combine two of them,” says Mr. Morin. While the duration of a fund may not correspond exactly to a plan’s demographic profile, he says it can reflect a plan’s time horizon well or very well.
Standard Life calls this a sophisticated solution, and the funds are available with management fees that vary depending on the size of the plan, usually around 0.03%. Mr. Morin points out that these costs are similar to those seen in index management.
The current economic challenges made this product launch necessary. “Long-term interest rates are causing a major crisis in defined benefit plans. Their liability increases when these rates fall, causing a greater debt for employers towards their employees. And liabilities have increased significantly in recent years,” notes Mr. Morin.
In an ideal world, he says an employer would fund its defined benefit pension plan with investments that increase when the liability is on the rise. However, traditional bond funds cannot fulfill this role. “They are not designed to track the liabilities of a defined benefit plan but to beat indices that are not related to this liability,” he says.
Standard Life Investments is also striking out against volatility with its Global Absolute Return Strategies Fund (GARS), a fund launched in March. However, it is only meant for institutional investors and high net worth individuals. The GARS is a private pooled fund that is only available to Canadian investors who are categorized as accredited investors under provincial securities legislation.
“The absolute return strategy aims to achieve positive and reliable investment returns regardless of market conditions, while managing the level of risk at the same time,” says Roger Renaud, president of Standard Life Investments.
Originally launched in Great Britain in 2006, Standard Life points out that the GARS fund only fell by 3.7% during the 2008 crisis while global equity markets fell more than 17.4%. Since its inception, the fund has generated a gross annualized return of 8.6% with a volatility of 5.9%. During the same period, global equities tracked by the MSCI World Index generated a return of 5.3%, with a volatility of 15.4%.