Friday, June 09, 2006


Managing Cash Flow or Returns?



With so much talk about actuarial assumptions and related shortfalls, little is said about absolute dollars (or pounds or pesos and so on). This is a mistake. Retirees can't pay their bills with paper returns. They need cold, hard cash. Even with defined contribution plans, there is the issue of a "pseudo" liability. Should 401k plan sponsors better track employee demographics and pick investment choices accordingly? (Some experts offer that lifestyle funds are a step in the right direction. That's a topic for another day.)

A new retirement index from the Center for Retirement Research at Boston College suggests that time may be nigh to reinvigorate the debate.

Returns or cash flow? That is the question.

On a rather bleak note, the Center reports that "nearly 45% of U.S. households are at risk of being unable to maintain their standard of living in retirement".

Scary stuff, beneficiaries are not the only ones affected. Investment and risk managers alike face new challenges when the goal is to match liabilities versus beating a benchmark.

1. Which part of the portfolio should be allocated to liability matching versus return enhancement?

2. What strategies make sense?

3. What is the role of mean-variance optimization when a portfolio is split?

4. Is it feasible to regularly evaluate demographics to reflect worker mobility when asset allocation changes are expensive or otherwise difficult to make?

5. What are the ancillary issues associated with liability matching techniques such as the use of derivatives?

The list of MUST ADDRESS questions is long. Risk control critically depends on the objective at hand.
posted by Susan Mangiero at 6/09/2006 12:33:00 AM