Liability-matching portfolios ‘should also generate returns’

Pension funds should deploy part of their liability-matching portfolios to generate additional returns, in the opinion of several experts.

During a panel discussion at the annual conference of Pensioen Pro, IPE’s Dutch sister publication, Xavier Baraton, chief global investment manager at HSBC Global Asset Management, argued that the main benefit of generating additional returns from this part of the portfolio was that the return portfolio “doesn’t need to work that hard”.

“Although important, [liability] matching is not the only thing that matters,” Baraton said. “Firstly, you need to take into account the liabilities for the short term. For the long term you need to construct a proper framework, of which matching is one of the elements.”

Jeroen van Bezooijen, head of EMEA client solutions at PIMCO, argued that pension funds should use returns from their matching portfolio to improve the potential for indexation.

Remmert Koekkoek, head of matching and overlay strategies at Robeco, said “slavishly” following a benchmark would generate more risks than drawing up a bespoke plan for matching portfolios.

“You want to avoid the risks of defaults and downgrades in the benchmark as much as possible,” he said. “Therefore, you need a more active approach.”

In contrast, Hanneke Veringa, AXA Investment Managers’ country manager for the Netherlands, emphasised that the matching portfolio should be solely used for its purpose of matching liabilities.

Investors who struggle with ultra-low interest rates on government bonds should consider alternative matching instruments such as mortgages and infrastructure, she said.

Veringa predicted that pension funds would face growing pressure to increase the risk exposure in their matching portfolios.

“With decreasing interest rates, a matching portfolio automatically generates surplus returns, but this becomes a problem if interest rates rise again,” she said. “As matching shouldn’t generate too many losses, matching instruments must be diversified.”

The panel’s participants called on the Dutch government to finally start issuing inflation-linked bonds as the perfect matching instrument for Dutch pension funds.

“This would be fantastic,” said PIMCO’s Van Bezooijen. “However, this is not going to happen, as the Dutch state doesn’t need them.”