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The Handbook of Financial Instruments by Frank J. Fabozzi

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Chapter 23 Stable-Value Pension Investments

John R. Caswell, CFA

Managing Partner Galliard Capital Management

Karl P. Tourville

Managing Partner Galliard Capital Management

The rapid formation and widespread use of defined-contribution pension plans in the United States over the last 15 to 25 years has significantly impacted the U.S. financial markets. The key feature of all of these plans that has profoundly impacted investment management trends has been the shift in responsibility for investment decision-making from plan sponsors to individual plan participants. For conservative participants whose primary investment objective is preservation of capital, stable-value investments have been widely used in both the corporate and public plan sectors due their attractive yields, stability, and safety.

A stable-value investment is an instrument in which contractual terms provide for a guaranteed return of principal at specified rate of interest. Examples of stable-value assets include fixed annuities and traditional guaranteed investment contracts (GICS), bank investment contracts (BICs), and GIC alternatives such as separate-account GICs and synthetic GICs. Stable-value pooled funds, which are professionally managed collective trusts investing in these assets, are also utilized. Growth in stable-value assets has paralleled that of the overall defined-contribution market, rising to over $225 billion by December 2001.

A key feature of a stable-value asset is its treatment from an ...

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