Pensions should consider structured products
(StructuredRetailProducts.com)
25/04/05
A recent conference run by French risk academics Edhec told its delegates pension plans should consider risk hedging by investing capital-protected structured products. The risk reduction properties of such products reduce the need for risk management by diversification said Professor Koray Simsek.
Simsek particularly favours the ‘third-generation’ portfolio insurance
products. “They would be very desirable especially to underfunded
pension products,” he said. Allocation to these products would depend on
the pension fund’s risk aversion.
Edhec revealed what it called the ‘first serious independent research’
into structured product allocations by pension funds at the conference.
The research revealed a serious improvement in the efficient frontier*
when structured products were added to the portfolio. The paper suggests
that investors with a strong risk aversion could replace bonds with
structured products.
Senior Watson Wyatt consultant Edouard Stucki agreed, adding that fully
funded schemes should be careful about affecting potential upside. Other
issues are counterparty risk and costs, he said.