NISA Puts Stake in the Ground With Volatility Index

Corporate plan fiduciaries and industry analysts may be comforted that future volatility in pension plans may be forecasted based on available data, which NISA has harnessed with its newly released index.

(September 27, 2012) — St. Louis-based NISA Investment Advisors–an independent investment manager for institutional investors–has announced the release of its Pension Surplus Risk Index (PSRX), an estimate of the funded status volatility of corporate defined benefit pension plans in the United States.

When asked about what spurred the decision to produce a volatility index, David Eichhorn, NISA’s director of investment strategies, tells aiCIO: “There’s been ongoing recognition of the risks inherent in pensions, and there is increased interest in how to manage those risks. It makes sense for us to put a stake in the ground and say ‘here is the risk of the average pension plan.'”

The index is a reflection of the heightened sensitivity to funded status volatility–a concern corporate plan sponsors continue to battle, the firm, with roughly $90 billion of institutional assets under management, highlights in a release. Additionally, NISA provides a matrix of risk estimates based on combinations of risk asset allocations, liability durations, and funded status levels for individual plans to determine a volatility level that corresponds to their circumstances. “These sub-indices assume hypothetical plans with static funded status, liability durations and risk asset allocations over time, for example, 85% funded, 12.5 duration and a 60% allocation to risk assets,” NISA says.

A number of indexes generally quote the average funded status of a corporate scheme, yet Eichhorn notes that the risk element is often missing from the equation. “NISA has always been an asset manager focused on risk management at its core,” he concludes. “While there are lots of indexes out there that are useful to pension stakeholders, ranging from prices indexes like the S&P 500 to volatility indexes like the VIX and a whole range of pension funded status indexes, this index uniquely outlines the risks of a typical pension plan.”

NISA’s index level represents a one standard deviation change in funded status over a one year horizon, based on the average of the 100 largest pension plans, as determined by NISA. For example, an index value of 15% suggests approximately a one in three chance that a $1 billion plan could lose or gain more than 15%, or $150 million, in funded status in one year, NISA explains. “As plans increasingly align the performance of their assets to that of their liability, taking control of funded status volatility is proving to be a foundation for judicious plan management,” the release states.

Related article:With LDI to the Fore, It’s NISA’s Time

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