The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Pension Fund Asset and Liability Management
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
In this chapter, we will deal with both the asset and liability side of the corporate balance sheet, both of which come from the corporate pension fund. The subject of ALM for pension funds is quite broad, and in this chapter we only offer our reader a peek into this vast area from the perspective of corporate risk. The interested reader should consult Mitra and Schwaiger (2011), Scherer (2003) or Kimyagarov and Shivdasani (2013).
The basic problem in pensions ALM is the mismatch between the pension’s assets and its liabilities. Companies that provide their employees with a defined benefit pension scheme guarantee a certain level of benefits for a period of time after retirement. These benefits form the pension liabilities and are backed by pension assets. Assets can be any financial assets, but most frequently they are shares and government or corporate bonds, held either directly by the pension fund or through third-party asset managers. A certain part of the liabilities is paid every year, but funds must take into account the net present value of future cashflows when computing the pension position. If the present value of all pension liabilities is higher than the present
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