Duration-enhancing overlay strategies for defined benefit pension plans

Abstract

Many large corporate and public pension trusts remain underfunded since the 2001-2002 recessionary periods. These plans are challenged by global demographic trends and the recent slowing economic conditions. We show that a special overlay strategy can improve performance and reduce risks by adding duration to the portfolio. The approach combines elements of liability-driven investing and asset liability management. Versions of the strategy are evaluated via historical data. In addition, the strategy is tested with a widely employed, forward-looking economic projection system. © 2010 Macmillan Publishers Ltd.