Measuring and managing liquidity are some of the most important responsibilities for a plan sponsor. A liquidity shortfall can result in serious legal and regulatory repercussions and threatens a plan’s ability to meet its liabilities as they come due. To avoid this, plans sponsors must measure the liquidity of plan assets on an ongoing basis while considering how funding requirements could change during crisis scenarios.
As an outsourced investment manager to many pension plans, State Street’s Global Fiduciary Solutions team provides plan liquidity analysis and portfolio stress testing for our clients. The team is currently working through various asset allocation scenarios with several of our pension plan clients. These include a plan sponsor that is considering re-risking the portfolio, as well as two plan sponsors that are further de-risking in preparation for offering lump sum buyouts to certain groups of plan participants. To help these clients decide on future allocations for each plan, we measure the liquidity of multiple allocation scenarios using the following framework.
Our analytical framework
To start, we break down the portfolio’s current strategies, estimating liquidity for each over the course of a day, week, month and quarter. The team considers both the inherent liquidity in underlying markets as well as in the structures themselves, estimating notice periods, settlement periods, and gating. Next, the GFS team incorporates potential future allocations, which entails estimating for managers/strategies that have not yet been determined. At this first stage of the project, liquidity estimates assume normal market conditions.
Source: State Street Global Advisors. Sample liquidity analysis provided for illustrative purposes only. Actual client allocations and liquidity analysis not shown.
The next steps in the project is to consider the scenarios that lead to rebalancing as well as the ramifications for each. The team considers normal benefit payments in addition to alternative needs. Recognizing that stress periods are typically accompanied by a decline in liquidity and/or increased transaction costs, the team provides best estimates for liquidity and costs during such periods using the ranges seen during past market crises.
The team then considers the costs and benefits of a range of liquidity enhancements that could be implemented in the portfolios. Examples of these enhancements, along with their potential benefits include:
Using different vehicles for certain investment strategies that could provide more immediate access to cash due to lack of formal notice and settlement periods;
Separating a portion of Treasuries in separately-managed bond portfolios, which could provide greater liquidity, lower transaction costs and less disruption to actively managed strategies;
Utilizing equity and bond futures as a source of exposure, liquidity and cost efficiency. These allow the client to retain exposure to their asset allocation targets while providing high liquidity through instruments that can be purchased, sold and resized very efficiently.
Examples of the potential costs to such enhancements include:
Unwanted tilts, tracking error deviation and higher transaction expenses;
One-time costs to rebalance separately-managed bond portfolios and standalone Treasury portfolio;
Excess returns derived from active investment management.
After considering these and many other liquidity-enhancing scenarios, formal recommendations are made to the client. The GFS team then builds a liquidity ladder, detailing the estimated cash that can be raised in each underlying investment strategy within a day, week, month and quarter. The liquidity ladder is provided for the client’s consideration when deciding on a change to the strategic asset allocation for their plan.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SSGA Funds.
THIS SITE IS INTENDED FOR U.S. INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.