Clearing a pension hurdle: giving state pension funds access to capital markets at reasonable rates.

When you're a foreign state pension fund, it's not always that easy to tap the capital markets the way that a U.S. fund earl like a CalPERS.

One reason is that the credit rating of these foreign state pension funds is not separate and apart from the credit rating of the country itself and many times emerging market countries have poor credit ratings because of various levels of financial mismanagement.

That means the financing, if available, is often far too expensive to make it worthwhile.

Without easy access to the capital markets, these funds sometimes end up in financial trouble and default on their obligations to retirees.

It doesn't help that assumptions about actuarial hurdle rates for emerging economies wrongly assume similarities with those of developed countries and that state pension risk control parameters are too stringent.

Eric Guichard recognized this problem after leaving his job at the World Bank in the late 1990s and founded GRAVITAS Capital, which works mostly with emerging market countries in Latin America, the Caribbean, Asia and Africa.

The mission of GRAVITAS, he said, is to pick up where the World Bank left off and customize solutions that the World Bank could not do because of its own limitations.

The idea, he said, is to approach a number of highly rated banks in Europe and "borrow" their balance sheet at a reasonable cost.

In other words, the Pension Support Fund founded by GRAVITAS would borrow from these banks and then invest the funds in a variety of safe, but diversified investments, such as U.S. Treasuries, high-yield corporate bonds, emerging market bonds and emerging market equities.

Those investments would then generate enough yield to pay back the bank debt, as well as help the pension funds generate higher yields than they otherwise could get to meet their long-term obligations.

The Pension Support Fund was implemented as a fund or hedging platform that is offered as a limited partnership to participating state pensions.

"The benefit of all of this is that the pension funds are now able to meet their long-term obligations, and the beneficiaries don't have to worry about defaults," Guichard said.

This also has a significant impact on these countries, and their economies are now able to provide for retirees and prevent these funds from defaulting.

Guichard is able to make this work because, when the fund borrows from banks, it gives them a say in how the money is invested. In addition, the banks can see that the Pension Support Fund itself has good credit and holds collateral from the state pension funds. In addition, the banks generate fees from the lending activity.

GRAVITAS also generates an investment fee, but the returns on the investment are enough to cover that and the other expenses and still provide a good return to the funds.

Guichard launched the program in 2008 and got "very, very good response from the countries and good response from the banks"--albeit delayed by the financial collapse.

"Nevertheless, the need for a way for state pension funds to hedge their future liabilities is further exacerbated by the 2008 collapse and I expect the solution to be in demand," he said.

About two or three countries participate in the program, and smaller commercial banks in emerging markets are interested in offering a similar program to retail clients.

Guichard said he has not actively marketed the concept yet but would seek to find a distribution platform that could market this solution to a larger group of clients.

"We are extremely proud of the implications for households in these countries as the impact is quite significant," he said.

The Pension Support Fund solves a longstanding problem that state pensions have had and at the same time provides GRAVITAS with a first-mover advantage, Guichard said.

[ILLUSTRATION OMITTED]

Gravitas has submitted the solution to the U.S. Patent and Trademark Office and it has granted GRAVITAS a "patent pending' status on the innovation.