Defined Benefit ALM

Defined Benefit ALM
Defined Benefit ALM is a sophisticated, flexible asset liability modeling solution for measurement and
analysis of market and longevity risk inherent in defined benefit pension schemes. It delivers a transparent
modeling framework that provides full control over model parameters, and provides end users the freedom
to calibrate risk drivers to reflect their own economic views. Using Defined Benefit ALM helps pensions
professionals quantify and understand the impact of key risk drivers on scheme investment and funding
strategies. It also helps them understand the interaction between investment strategy and contribution
schedule.
The Challenge: Achieving Investment Objectives in a Volatile Market
Pension scheme trustees are accountable for achieving investment objectives in a volatile market. They begin with their
attitude to risk, and must decide the scheme’s risk appetite, how the risk budget should be spent, and the investment
and funding strategies that reflect the type and nature of the scheme’s liabilities. These responsibilities require them to
understand the pension scheme’s risk exposures, and how it is rewarded for taking risks, in a volatile market. However, this
information is often unavailable or uncertain, so trustees are challenged to obtain the insights they need to make these
important decisions.
The Solution: Stochastic Modeling of Market and Longevity Risk for Pension Scheme Management
Defined Benefit ALM measures the market risk exposure of the pension scheme allowing for the specific detail of investment strategy,
funding strategy and scheme liabilities. Decomposing the overall risk into the individual risk factors allows at-a-glance analysis into the
specific risk exposures confronting the scheme. Defined Benefit ALM provides the granular modeling, asset class coverage and control over
model parameters required by the most sophisticated schemes. It enables stress tests of model tails and sensitivity analysis.
Explain changes in the balance sheet and identify
the key risks being run by decomposing the
overall risk into its component parts.
Defined Benefit ALM
Comprehensive Asset Coverage and Full Control over Model Parameters
Defined Benefit ALM supports the full range of asset classes and economic risk drivers provided by the award-winning Economic Scenario
Generator. In addition to traditional asset classes like equities, bonds, credit and property, Defined Benefit ALM also allows the scheme to
model alternative assets such as hedge funds and private equity funds. It enables stress tests of model tails and sensitivity analysis. This
feature appeals to pension professionals who need a high degree of customization when managing schemes invested in alternative assets
and derivatives, and firms with a sophisticated asset and liability structure.
Scheme Liability Modeling
Scheme liabilities can be modeled down to the tranche level capturing the full range of increase types across different classes of scheme
membership. Liability models support fixed, inflation-linked and limited price indexation (LPI) style liabilities. There is support for liability
tranches with distinct pre- and post-retirement increase types. Liabilities can be valued based on various curves including government,
credit and swap with support for different pre- and post-retirement valuation bases.
Accruals can be modeled separately for each active tranche enabling you to capture the tranche-specific characteristics such as postretirement increase type. Defined Benefit ALM supports the modeling of multiple schemes simultaneously. Each scheme can be set up in
the home currency with the overall result aggregated in the sponsor’s currency of choice.
Strategy Comparison, Journey Planning and Hedging Overlays
Projecting the scheme position on multiple different candidate investment strategies and comparing the outcomes as measured by
scheme metrics, such as the funding level, helps identify the best investment strategy to meet scheme objectives. The optimal recovery
plan can be investigated and identified by varying the contribution schedule with a fixed investment strategy.
Design a journey plan to full funding using the rebalancing functionality within Defined Benefit ALM. The funding level triggers help de-risk
the scheme by switching out of return-seeking assets and into matching assets as the funding level improves. Interest rate and inflation
triggers together with pooled swaptions and other derivative instruments can be used to design a hedging overlay that progressively
removes interest rate risk and inflation risk as economic conditions become more favorable.
Analysis and Output
Defined Benefit ALM supports a comprehensive array of outputs available in both CSV format and programmatically via an Application
Programming Interface (API). The Defined Benefit ALM analysis tool compiles the CSV output into an accessible graphical format. It
supports standard investment report collateral such as funnel charts and strategy comparison charts as well as a wider range of output,
including a risk decomposition chart, an initial balance sheet and time-zero stresses of the initial balance sheet showing the impact of a
change in the time-zero yield curve.
Results from up to five simulations or outputs can be compared side-by-side using the strategy comparison analysis. The broad range of
charting capabilities in the analysis tool provides rapid access to a visual summary of the results and performance outcomes.
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Providing Support for Pensions Professionals
Pensions professionals will benefit from being able to:
»» Quantitatively compare alternative asset allocation strategies and their impact on the funding level and surplus.
»» Assess how the investment strategy can influence deficit recovery schedules and the level of contributions.
»» Design and test the effectiveness of hedging strategies, using a comprehensive array of derivative instruments including LPI swaps.
»» Investigate the impact of potential de-risking strategies using dynamic rebalancing.
»» Understand the impact of more frequent monitoring by projecting on a monthly time step.
Determine appropriate asset allocation, investigate the impact of investment strategy on the contribution schedule and implement a
de-risking strategy.
Construct triggers using multiple variables:
»» Funding Level.
»» Surplus/Deficit.
»» Nominal or real spot rates.
»» Corporate bond yields.
»» Inflation.
»» Asset returns.
»» Time.
Defined Benefit ALM Features
Defined Benefit ALM provides pensions professionals with:
»» Consistent projection of assets and liabilities over multi-year periods and various time steps, using a choice of rebalancing methods
including dynamic rebalancing.
»» Full access to model parameters supported by a comprehensive suite of calibration tools and a wide range of user selectable output
variables.
»» The ability to model multiple funds across multiple economies each with full coverage of interest rates and asset classes including
equity, property, credit and alternatives.
»» Liability valuation based on government, swap or corporate curves, LPI, different increase types pre- and post-retirement, granular
modeling of accruals at the tranche level.
»» Modeling of pooled Liability Driven Investment (LDI) funds and various equity, interest rate and inflation derivatives including LPI swaps.
MOODY'S ANALYTICS 3
Extend your modeling capabilities with more products in the Pensions Suite
Not all pensions professionals wish to manage, run and calibrate models in-house.
Pension Risk Analytics is the ideal solution for the modeling challenges faced by pension schemes investing in mainstream asset classes
and off-the-shelf investment funds. It is easy to use, and provides immediate access to graphical outputs for investment reports and
collateral supporting client conversations.
Scenario Service is used by pension funds and asset managers to understand and manage their market risks. The service is suitable for
problems that require paths from one-year to ultra-long time horizons, and with monthly or annual time steps. The service provides wide
coverage of economies, risk factors, assets and outputs, and can be configured to meet client-specific demands. Quarterly calibrations are
provided as standard.
Building on the Economic Scenario Generator
Defined Benefit ALM adds liability and liability-asset interaction modeling to the economic and asset scenario modeling capability of
the award winning Economic Scenario Generator. Together, they deliver a sophisticated ALM solution for pension professionals engaged
in pension fund risk management. The Economic Scenario Generator models multiple risk drivers across multiple economies capturing
sophisticated market features such as tail risk correlation and non-normal distribution of asset returns.
About Moody’s Analytics
Moody’s Analytics, a unit of Moody’s Corporation, helps capital markets and credit risk
management professionals worldwide respond to an evolving marketplace with confidence.
The company offers unique tools and best practices for measuring and managing risk through
expertise and experience in credit analysis, economic research and financial risk management.
By offering leading-edge software and advisory services, as well as the proprietary credit
research produced by Moody’s Investors Service, Moody’s Analytics integrates and customizes
its offerings to address specific business challenges.
CONTACT US
Visit us at barrhibb.com or contact us at a location below:
AMERICAS
+1.212.553.1653
[email protected]
EMEA
+44.20.7772.5454
[email protected]
ASIA (EXCLUDING JAPAN)
+85.2.3551.3077
[email protected]
JAPAN
+81.3.5408.4100
[email protected]
© 2015 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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