INTEGRATED RISK MANAGEMENT IN PRACTICE

We were delighted to see the article in the Actuary this month looking at the impact of including covenant risk in asset liability modelling for defined benefit pension schemes and thank the authors for bringing this important topic to a wider audience.

Our mission is to create easy online access to these tools for all schemes. Technology is the great enabler of our age and we believe that all trustees should be able to access this advice based on their circumstances and presented in a clear and engaging fashion so that they can make funding and investment decisions with confidence.

We agree with the arguments presented in the article and most certainly DO INCLUDE these features in our ALM toolkit for schemes and their advisers. We are strong advocates of measuring the proportion of benefits paid (PBP) and making Integrated Risk Management (IRM) analysis available to all schemes as part of their funding and investment planning.

Moreover, whilst we like the Expected PBP we will always look at the Full Distribution of PBP to understand the range of outcomes

The two (very different) strategies modelled in the chart here are for a fairly well-funded scheme with a weak employer. You will note that both strategies give the same average benefit shortfall – but might deliver a very different profile of benefit cuts. Which strategy would you prefer?

Where it is useful to translate PBP into a single figure to compare strategies we will include a utility measure penalising bad outcomes more strongly, with parameters derived from discussing sample outcomes like these.

Furthermore, whilst the stochastic simulations will naturally create a distribution of PBP depending on the economic and covenant outcomes.

This analysis can also be used to investigate inter-generational fairness. What are the PBP for different cohorts? Who are the winners and losers? How does this affect the investment decision?

We hope that more and more people will start looking at these questions. Please add your comments and contact us today if you would like this toolkit to explore these questions for your scheme…

info@financialcanvas.co.uk