Beyond parallel shifts in pension plan liability hedging
Can pension plans carry more interest rate risk than they believe?
Many defined benefit plan sponsors measure interest rate risk through duration and the resulting interest rate hedge ratio. A hedge ratio near 100% is often viewed as a sign that interest rate risk is well controlled.
But what if that metric is potentially missing a meaningful portion of interest rate risk?
While the interest rate hedge ratio captures the impact of parallel shifts in the Treasury yield curve, empirical findings suggest that approximately 15%–30% of price changes in fixed income assets and liabilities can stem from non-parallel changes. As a result, plans may carry more interest rate risk than they believe.
Incorporating non-parallel metrics such as key rate duration may provide a more complete view of risk and help identify potential gaps in portfolio construction.
Our latest paper explains the differences between the interest rate hedge ratio and key rate durations and illustrates how key rate duration mismatches could negatively impact a plan’s funded status. Read the full paper to learn more.
