Pension Plans, Portfolio Insurance and FASB Statement No. 87: An Old Risk in a New Light

Until now, pension plan managers have viewed portfolio risk as a question of variability. Some reduce the risk by diversifying, while others are considering portfolio insurance. Financial Accounting Statement (FAS) 87, effective January 1, 1987, redefines pension plan objectives. The firm's goa...

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Bibliographic Details
Published in:Financial analysts journal 1987-01, Vol.43 (1), p.10
Main Authors: Somes, Steven P, Zurack, Mark A
Format: Article
Language:English
Subjects:
Accounting standards
Bond portfolios
FASB statements
Insurance
Interest rates
Pension funds
Pension plans
Portfolio management
Risk
Surplus
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Summary:Until now, pension plan managers have viewed portfolio risk as a question of variability. Some reduce the risk by diversifying, while others are considering portfolio insurance. Financial Accounting Statement (FAS) 87, effective January 1, 1987, redefines pension plan objectives. The firm's goal is not to maximize surplus growth. Its risk is of a surplus decline because FAS 87 looks at asset returns only as they relate to the present value of liabilities as measured by market interest rates. The surplus will change as interest rates change. This is the greatest risk the pension plan manager faces. Although an immunized bond portfolio sharply curtails such risk, it also eliminates equities' higher expected returns. Aimed in the right direction, portfolio insurance can meet both of these objectives. Portfolio insurance can preserve a minimum surplus by establishing an initial exposure in equities that will change as the surplus changes. Part of the surplus is put at risk to cover the potential cost of limiting losses.
ISSN:0015-198X
1938-3312