State Street Global Advisors has launched its Pooled Asset Liability Matching Solution (PALMs), which enables pension funds to match their projected future liabilities within different inflation environments using a pooled vehicle.
The new product provides access to nine pooled funds holding different maturity Limited Price Inflation swaps (LPI, or inflation-linked securities) to protect assets and preserve pensioners’ purchasing power in both high and low inflation environments. Pension funds with varying liability requirements can purchase different allocations of the nine funds, which are divided into five-year increments reaching out to 40 years that individually deliver annual cash flows when they are needed.
The benefit of the LPI swaps lies in their ability to reshape the return from assets by exchanging cash flows. As the liabilities of pension funds are usually linked to future earnings in the form of inflation, PALMs delivers future projected cash flows (or pensions payable) linked to their projected LPI liabilities at the maturity of each of the LPI swaps.
“PALMs represents a generational change in investment management strategy for pension plans,” said Alan Brown, group chief investment officer for State Street Global Advisors. “By recognising that liabilities, not market benchmarks, are the correct measure of a pension plan’s ability to meet its obligations to pensioners, we can more closely match the client’s liabilities over time, reducing the risk of over- or under-funding. We expect this concept to grow in popularity because it places more investment control back in the hands of trustees.”
Additionally, PALMs offers transparent pricing, flexibility to adjust investment allocations across the maturity spectrum, fixed entry and exit spreads, and monthly valuations. Further, the flexibility of the underlying structure of PALMs allows pension plans to adopt different liability matching strategies and re-spend the pension funds’ risk budget for more reward. For example, a pension plan can choose to incorporate alpha-generating strategies such as the use of credit markets to add extra yield.
The new pooled funds will be managed by State Street Global Advisors’ London-based Global Fixed Income management team. State Street Global Advisors will provide market data on each of the nine funds to the pension fund’s consultant so they can recommend any necessary changes in allocation weights in order to meet liabilities.