The Ontario Teachers' Pension Plan "Advanced Investment Solutions for Liability Hedging for Inflation Risk" Research Chair
A recent surge in inflation uncertainty has increased the need for investors to hedge against unexpected changes in price levels. Inflation hedging is a concern of particularly critical importance for pension funds, in situations when pension payments are indexed with respect to consumer price or wage level indexes. The implementation of inflation-hedging portfolios has become relatively straightforward in specific contexts where either cash instruments (Treasury inflation protected securities, or TIPS) or dedicated OTC derivatives (such as inflation swaps) can be used to achieve perfect hedging. More generally, however, the lack of capacity for inflation-linked cash instruments and the increasing concern over counterparty risk for derivatives-based solutions leaves most investors with the presence of non-hedgeable inflation risk.
Another outstanding problem, even when perfect inflation hedging is possible, is that such solutions generate very modest performance given that real returns on inflation-protected securities, negatively impacted by the presence of a significant inflation risk premium, are typically very low.
In this context, we will be analysing the design of novel forms of inflation-hedging portfolios that do not solely rely on inflation-linked securities but instead involve substantial investment in traditional asset classes. Overall these novel forms of inflation hedging solutions should be engineered to generate higher expected performance for a given inflation hedging level, which in turn will allow for a decrease in the cost of inflation hedging.
The chair will be overseen by a steering committee which includes representatives of OTPP and EDHEC-Risk Institute.
The research output from the chair will be published in this section in due course.
About Ontario Teachers' Pension Plan
With $107.5 billion in net assets at December 31, 2010, the Ontario Teachersí Pension Plan (Teachersí) is the largest single-profession pension plan in Canada. An independent organization, it invests the pension fundís assets and administers the pensions of 295,000 active and retired teachers in Ontario.
A pension plan has existed for Ontario teachers since 1917. Today, the planís members include 178,000 teachers in elementary and secondary schools in Ontario, 117,000 pensioners and 68,000 inactive members. The plan has one of Canadaís largest payrolls with $4.5 billion in benefits paid to plan members, and $2.7 billion received in total contributions from teachers, the provincial government and designated employers in 2010.