State Street Global Advisors Report Offers Guidance to Pension Funds Seeking to Recognize and Manage Risk

State Street Global Advisors (SSgA), the investment management business of State Street Corporation (NYSE:STT), says that managing for a total outcome rather than focusing on the returns of individual strategies or asset classes is key to solving the risk/reward dilemma faced by many underfunded pension funds. In a recent paper, "Managing Pension Risk: Confront Your Risk/Reward Dilemma” ¹ SSgA offers actionable insights for pension managers and investment committees and boards of pension plans, foundations, and endowments seeking different perspectives on how to strategically and dynamically manage pension risk.

SSgA notes that investors’ ability to recognize and manage risk has been tested in the face of market volatility and a shifting regulatory landscape. New accounting rules that have emphasized greater transparency, the Pension Protection Act of 2006 which put more emphasis on the asset/liability mismatch, and increased capital market risk have caused pension managers to struggle with remaining properly funded, match assets to liabilities, and manage contribution increases.

"The environment that we’ve been in recently has presented increased challenges for pension managers and as a result, we believe there has to be an even greater emphasis on understanding risks across the portfolio and then managing those risks dynamically over time,” said Dan Farley, senior managing director of SSgA and chief investment officer of SSgA’s Investment Solutions Group. "We are working with plan sponsors to first understand the total portfolio situation, and help structure distinct growth and hedging portfolios to address the plan’s risk/return parameters.”

In the paper, SSgA outlines its four beliefs for successfully managing pension risk:

• Clear understanding of an institution’s pension liabilities and where a plan may be at risk
• A focus on the outcome; shifting from making strategy and asset allocation decisions based on asset return only, balancing the need for return with managing specific risk factors
• Unique portfolio designs tailored to each plan’s situation

¹ "Managing Pension Risk: Confront Your Risk/Reward Dilemma” is part of an SSgA campaign dedicated to managing pension risk. For more information, visit http://www.ssga.com/webapp/pensionrisk/

Thoughtful risk budgeting that takes into consideration risks that may be rewarded as well as risks aligned with funding status

According to Farley, SSgA’s unique, holistic approach offers pension risk solutions across the key areas: reducing equity volatility, developing strategies for non-correlated returns, identifying solutions for optimizing income, and managing liability exposure. "Employing a needs-based framework to portfolio construction, our approach is designed to optimize growth portfolio assets, actively manage portfolio risk and manage the plan’s funding ratio volatility,” said Farley.

SSgA’s Investment Solutions Group is a dedicated team of more than 50 investment professionals operating in major investment centers around the world. The team specializes in managing and advising investors on asset allocation, risk management, portfolio construction and plan implementation, developing customized solutions tailored to specific needs. Together with expertise from across SSgA, the Investment Solutions Group collaborates with clients in strategic relationships that are designed to solve their most pressing investment challenges.

About State Street Global Advisors

State Street Global Advisors (SSgA) is a global leader in asset management. The firm is relied upon by sophisticated investors worldwide for its disciplined investment process, powerful global investment platform and access to every major asset class, capitalization range and style. SSgA is the asset management business of State Street, one of the world's leading providers of financial services to institutional investors.

The views expressed in this material are the views of SSgA’s Investment Solutions Group through the period ended January 31, 2012, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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