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Pension Funds Can Benefit from Exchange-listed Options

By Frank Tirado, Vice President, The Options Industry Council
September 8, 2016

The realities of current global economic conditions, characterized by ultra-low to negative interest rates and slow growing economies, plus a widening liability gap, are putting pressure on pension funds to meet their obligations. In fact, in a recent article in the Financial Times "Pensions: Low yields, high stress", it was noted that the amount of U.S. assets held by pension funds have grown 105 percent since 1999 while the cost of their liabilities to pensioners has almost quadrupled, up 278 percent over the same time period.

Traditional low-risk methods used by pension funds to generate returns are proving to no longer be practical. As bond yields keep falling, more pension funds are broadening their investment scope and looking at new strategies to better meet their funding obligations, and that includes the implementation of income-generating and risk-mitigating exchange-listed options strategies. In another recent article in the Wall Street Journal "In Scramble for Yield, Pension Funds Will Try Almost Anything", representatives from the retirement systems of Hawaii and South Carolina were featured as examples of pensions that have decided to implement exchange-listed options strategies.

Why are institutional investors increasingly using options to manage risk? Most institutional money managers are rooted in the realities of current economic conditions which are challenging their return assumptions and requiring new solutions that mitigate risk and generate income. Public pension funds like the New Jersey Public Employees" Pension Plan, the State of Wisconsin Investment Board, Texas Tech University System, Ontario Teacher's Pension Plan and Employees Retirement System of Texas are using exchange-listed options to mitigate risk and generate income. This year, the Hawaii Employees' Retirement System, the South Carolina Retirement System Investment Commission and State University Retirement System allocated a combined $3.4 billion to exchange-listed options strategies for the same reasons. Based upon these examples, and Morningstar's decision to launch a new "options writing" category in April, we believe this is a growing trend.

The Options Industry Council (OIC), an industry cooperative funded by OCC, the world's largest equity derivatives clearing organization and the U.S. options exchanges, meets with institutional investors and participates in industry conferences where we are seeing a growing interest in how exchange-listed options can help market participants achieve their investment goals. In March I presented to the Ohio Police & Fire Pension Fund (OP&F) Board Members and staff. OP&F do not currently use exchange-listed options, but asked OIC to help them understand how these risk management instruments are used by institutions. In April, I attended a Pensions & Investments conference: "Navigating the Prolonged Low Yield Environment," where pension fund managers, consultants and other institutional industry professionals were in attendance and several discussions led to the topic of using exchange-listed options strategies to help pensions meet their obligations. Clearly, options are not for every pension and not a panacea, but when used properly, they can be a great income generating and risk management tool.

For nearly 25 years, OIC's mission has been to provide compelling educational content that increases the responsible use of exchange-listed options among individual investors, financial advisors and institutional investors. In fact, we have strong partnerships with market participants including institutional investors via the OIC Roundtable and we will soon create an Institutional Leadership Council to keep open the lines of communication and hopefully attract more users to our markets. OIC will continue to keep its focus on the evolution of the institutional segment and on their educational needs.

For more information and research on how to use exchange-listed options please visit the News & Research Tab on www.OptionsEducation.org. You can also follow OIC on social media:

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To learn more about OCC's thought leadership on industry issues, visit OCC's Blog.


Categories: Industry Education, OIC, Pension Funds