How Pension Funds Confront The FX Risk

This year’s currency risk contenders include trade disputes, the slower economy in China and Europe, and the possibility of changing base rate differentials, just to name a few.

Having a fund’s risk unhedged might be a risky move for investors. When it comes to currency risk, “often currency risk is one that has no benefit,” PGGM senior strategist Frank Vinke explains: “So hedging out this risk may improve the quality of the portfolio.”

How Do Pension Funds Work?

Traditional pension plans, usually referred to as pension funds, have been on the decline in the private sector for many years now. Employees in the public sector, such as those in law enforcement, now make up the majority of those having both active and expanding pensions.

The average income of the last five years of work may be used as an example of a pension plan that pays 1% for each year of service multiplied by five. So, a 35-year-old employee with an average final-year salary of $50,000 would earn $17,500 a year from that employer.

When it comes to pensions, the biggest in the country, the California Public Employees’ Retirement System (CalPERS), pays out 2 percent every year in many cases. That means a 35-year-old employee making $50,000 a year might be eligible for a yearly bonus of $35,000 if they had 35 years of service. 

Some pension plans have lowered management costs by turning completely passive, simplifying the process.

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Rob Schreur, CIO of the UK’s National Grid Pension Scheme, says, “We halted active currency management three years ago, after a review of all components of the scheme’s portfolio.” In his explanation, he says that the scheme was not satisfied that active currency managers could consistently contribute value after fees.  

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