"Pension Buyouts", posted October 5 on AllAboutAlpha.com

Bob Swarup, CAIA, Partner, Pension Corporation

Over the past 2 years, a revolution has been quietly brewing.  Rather than using portable alpha or liability-driven investing some pension plans are throwing in the towel entirely and off-loading their funds to third parties.  One such third party is the innocuously-named Pension Corporation, a London-based company whose business includes buying up pension liabilities.  In our series featuring the thoughts of the CAIA Association members, Dr. Bob Swarup of Pension Corporation, explains what led to the birth of this potentially massive new industry. 

To much of the investment community, most pension funds are boring entities eternally bound to old family recipes of formulaic asset allocations - Balanced, Conservative and Growth - all left to ferment for the next half century or so.  The logic is impeccable - they have the luxury of a long-term perspective, many adherents will argue, that allows them to ignore the short-term volatility of the financial markets and focus on harvesting the inevitable risk premia of these asset classes over time to meet the liabilities of their pensioners as they fall due.

Ironically, this same attitude is also responsible for making pension funds the perennial cold call for every manager looking to add some 'sticky' money to their assets. They are comfortable with modest (others may term "disappointing") returns, they are slow to redeem (unlike the rest of those pesky investors) and they are remarkably understanding of failure, just like your mother was after you drove over the family cat.

Read on