State Street Offers Guidance on Managing Pension Plan Risk

February 21, 2012 ( - State Street Global Advisors (SSgA) says managing for a total outcome rather than focusing on the returns of individual strategies or asset classes is key to solving the risk/reward dilemma faced by many underfunded pension funds.

In a recent paper, “Managing Pension Risk: Confront Your Risk/Reward Dilemma,” SSgA offers actionable insights for pension managers and investment committees and boards of pension plans, foundations and endowments seeking different perspectives on how to strategically and dynamically manage pension risk.  

SSgA notes that investors’ ability to recognize and manage risk has been tested in the face of market volatility and a shifting regulatory landscape.  New accounting rules that have emphasized greater transparency, the Pension Protection Act of 2006, which put more emphasis on the asset/liability mismatch, and increased capital market risk have caused pension managers to struggle with remaining properly funded, match assets to liabilities, and manage contribution increases.  

“The environment that we’ve been in recently has presented increased challenges for pension managers and as a result, we believe there has to be an even greater emphasis on understanding risks across the portfolio and then managing those risks dynamically over time,” said Dan Farley, senior managing director of SSgA and chief investment officer of SSgA’s Investment Solutions Group. “We are working with plan sponsors to first understand the total portfolio situation, and help structure distinct growth and hedging portfolios to address the plan’s risk/return parameters.”  

In the paper, SSgA outlines its four beliefs for successfully managing pension risk: 

  • Clear understanding of an institution’s pension liabilities and where a plan may be at risk; 
  • A focus on the outcome; shifting from making strategy and asset allocation decisions based on asset return only, balancing the need for return with managing specific risk factors; 
  • Unique portfolio designs tailored to each plan’s situation; and 
  • Thoughtful risk budgeting that takes into consideration risks that may be rewarded as well as risks aligned with funding status. 

According to Farley, SSgA’s approach offers pension risk solutions across the key areas of reducing equity volatility, developing strategies for non-correlated returns, identifying solutions for optimizing income and managing liability exposure.  

The report is available at