Panel Discussion on Institutional Liabilities and Option Strategies

The final session at CBOE’s Risk Management Conference in Europe today was a panel discussion that was titled Real Money:  Institutional Liabilities and How Options Strategies Can Help.  The moderator was Abhinandan Deb, Head of European Equity Derivatives Research, Bank of America Merrill Lynch.  The panelists were:

  • Jon Havice, President and Chief Investment Officer, DGV Solutions
  • Michael Holliger, Portfolio Manager, Swiss Life Asset Management AG
  • Dan Mikulskis, Head of DB Pensions, Redington, Ltd.

Before the discussion each panelist made about a 15 minute presentation.

Jon Havice led things off highlighting the types of liabilities that institutions are charged with matching.  He notes that option strategies offer the ability to reduced downside exposure without reducing return expectations, although some upside participation will be sacrificed.  He spent some of his presentation discussing how many pension funds are currently underfunded.  He did note the CBOE Put Write Index (PUT) as a good example of a strategy that offers equity like returns with lower volatility of those returns.  Finally, he demonstrated PUT performance in different market environments and noted that is many regimes PUT outperforms the S&P 500.

Michael Hollinger followed up discussing the pension system in Switzerland and what factors influence equity positioning at Swiss Life.   Four factors that impact equity positioning are regulatory in the form of the Swiss Solvency Test, accounting treatment of investments, return expectations, and liability structure.  He noted three different potential equity exposures:   long the market, long market plus a put-spread collar, or long market plus owning a put.

Dan Mikulskis was the final presenter and he discussed the pension funding gap in the UK.  He spent some time discussing different approaches to filling the gap and he noted that there are many more tools and methods to close the gap than have been available in the past.

A takeaway from this panel was that despite the headlines that look pretty dire with respect to unfunded liabilities.  However, the situation may be manageable over time and the gap can be closed.