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Investment bankingMarch 7 2005

Innovation fills the asset/liability gap

The search for yield has been producing great innovation in credit for some time. Now the focus has moved on to the more complex problems of European pension funds. Closing the yawning gaps between pension fund assets and liabilities takes more than a bit of yield enhancement to fix. Complex derivatives structures are often involved.
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To funds that have traditionally shied away from derivatives on grounds of risk and complexity, these structures can seem a little outlandish. As a result many have refrained from using them.

But as things stand, pension fund managers are faced with considerable duration imbalances in their balance sheets (the impact of changing interest rates on a portfolio of bonds) as well as facing other risks such as changes in life expectancy, retirement dates etc.

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