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Bailey McCann, Opalesque New York:

As a result of strong equity performance and rising interest rates in 2013, the funded status of many corporate pension plans has improved, and in some cases, plans are now fully or overfunded. In a new paper from KKR authors seek to challenge the previous thinking that the best way to protect a pension plan’s funding ratio is typically to increase the plan’s allocation to fixed income and long-duration bonds. Based on our analysis, we believe that absolute return strategies offer a potential solution to better manage funding risk and grow or preserve a plan’s funding ratio.

The paper explains that current market conditions which are likely to include rising interest rates increasing allocations to fixed income (liability-driven investing, or LDI) may not be as safe as it has been historically. "A rising rate environment poses significant obstacles to the success of traditional LDI strategies because the gains made from decreases in liabilities (which improve the funding ratio) are partially offset by a fall in the value of the bond portfolio (which decreases the funding ratio). In addition, long-duration bonds may contribute more risk to the asset portfolio than a diversified return-seeking portfolio," authors write.

Conversely, absolute return strategies which have low volatility and low correlations to interest rates are more likely to be b......................

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