Cash-balance liabilities: A new investment framework
With no natural liability-hedging asset, cash-balance plans require a unique investment lens

Cash-balance plan liabilities have been growing as a percentage of overall defined benefit plan liabilities, yet relatively little attention has been paid to the unique characteristics of these liabilities and their investment implications. 

While a high-quality long-duration bond portfolio would generally be considered a natural hedge for a traditional plan liability, there is no such natural liability-hedging asset for many cash-balance plans due to their interest credit formula. Consequently, any investment strategy that aims to keep pace with the formula will require some degree of risk-taking. 

With this in mind, we sought to devise an investment framework that aims not to hedge but to track cash-balance plan liabilities. We began by distilling the cash-balance liability into what we view as its key risk characteristics and then identified three desired investment attributes: preservation of capital, consistent income, and liquidity.

In this paper, we offer an introduction to cash-balance plans and the formulas used to calculate their benefits. We then consider how these formulas affect the choice of an investment strategy. Finally, we outline our new investment framework.
Sponsored By
I agree to share the above data with ISS and the content’s sponsor(s) for the purpose of accessing this content. I understand I may be contacted by ISS or the sponsor(s) in the future. Any emails sent by ISS will include the option to opt out of future communications. Further information is set out in the Privacy Policy of this site.

Subscribe to receive our latest news and events! (Optional)

Subscribe to our daily newsletter for the latest industry news and in-depth reporting