Risk management


We are currently finding that several clients are struggling to establish a framework which enables the pensions director to work alongside their finance function to develop a risk reduction strategy. The problem is that the finance team do not have a high degree of confidence in the traditional asset liability modelling (ALM) being used by their incumbent adviser. They feel that the ALM’s underlying economic model is not at all transparent, nor well aligned to the company’s own economic views.

Understanding pension risk

The difficulty here is that, when looking at pension risk management, advisers tend to impose their own views on a wide range of economic variables, so as to be able to model the risk. Although this may be what some companies want, most large companies have strong house views on the economic variables and they use these views to make financial decisions across their business operations.

bac’s approach is to start by talking to the finance function, so as to get a thorough understanding of their financial models and decision-making approach. We then model the company’s pension risk using its own views of the economic outlook and illustrate how the risk varies by using the sensitivity parameters that the company adopts for its internal “what if” scenario planning.

Sitting alongside this analysis, we provide a critique of how the company’s internal models compare with those used by the trustees’ advisers and how this might affect the trustees’ view of risk reduction solutions as compared with the company’s perspective.

By removing the finance team’s concern about the underlying economic model, it is possible to keep the discussion at the “big picture” level and so focus on the key areas of pension risk and the possible corporate pension solutions that make most sense. This leads to a much faster decision-making process and more rapid engagement with the trustees.