Pension Risk Management ALM Discussion

Financial Services, Regulatory, and Risk Consulting LLC Matthew Kruse, Partner

in conjunction with Quiet Light Trading LLC

January 2011

Section 1 Section 2 Section 3

De-Risking Glide Path Monitoring & Reporting

Asset Liability Management

Approach Funded Status* Attribution

Capital MarketsModeling

Tailor to each plan* Open / Closed / Frozen* Funded Status* Duration* Funding Policy

Risk Factors* Assets* Liabilities

Model Outputs

Implementation Metrics Analysis

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Commentsa) For a 100% funded plan, long term return on asset of approximately 7.6% should generate the necessary return to cover annual benefit accruals.

b) If the plan runs a surplus, a small allocation to growth assets would be sufficient to sustain the amount. This is based on the theory that liability matching to assets will generate a return equivalent to liability growth rates.

c) To mitigate volatility, such an allocation would improve the likelihood of sustaining the surplus.

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Commentsa) Static asset allocation leads to more risk as funded status improves.

b) Steady level of surplus returns can be generated while taking less risk of losing funded status.

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It is important to monitor periodic changes in liabilities, assets, and funded status to attribute the sources of change for comparison to risk buckets and hedging targets.

The goal is to understand drivers of performance and have information to support adjustments to investment strategies.

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Step 1: Generate* Inflation* Economic Growth

Step 2: Generate

* Nominal Yield Curve* Real Yield Curve* Equity Yields* Dividend Yields* Corporate Bond Spreads

Step 3: Determine Change in Exchange Rates

Step 4: Compute* Bond Returns* Equity Returns

Step 5: Determine International Returns

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a) Within the model, the fundamental factors of growth (GDP), inflation, and interest rates should be contemplated, including correlations between the three.

b) A multi-factor Monte Carlo model is recommended.

c) Major economic impairments should be considered.

d) Results should be discussed with the team, to make informed strategy decisions.

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Financial Services, Regulatory, and Risk Consulting appreciates the opportunity to offer ALM advisory services, in partnership with Quiet Light Trading LLC.

Feel free to contact Matthew Kruse to discuss engaging FSR2’s services.

Matthew KruseFSR2 [email protected]

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Pension Risk Management ALM Discussion

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