Wed, 13 Aug 2014 17:11:48 GMT
There are some topics that grab your imagination, and demand immediate attention and interest: things like war, recession, and the World Cup. Unless you share my particular personality quirks, however, the risks of unscientific backtests are unlikely to be among them. This is a shame, however, as unscientific backtesting poses a pervasive, insidious and largely unquantifiable hazard.
There are many reasons why backtests may turn out to be unscientific, but in principle the mistake is always the same - where there is a lot of noise in a data set, and one can try lots of models, it is easy ...
Mon, 11 Aug 2014 09:33:17 GMT
Round the Island race is one of the largest yacht races in the world hosting 16,000 sailors on 1,700 boats, who are fiercely competing with each other to race around the Isle of Wight. This year’s race, albeit on a beautifully sunny summer solstice day, was plagued by light airs. Under these conditions sailing races are only won with intense concentration, strategic thinking and skill. The first leg of the race is from the sailing capital of the world, Cowes, to the western most point of the Solent marked by the Needles. This leg took an almighty 4 hours of concentration, strategy a ...
Thu, 07 Aug 2014 16:09:06 GMT
The most frequently repeated mantra in pension land is probably that everything will be well once interest rates rise from their unprecedentedly/artificially/outrageously low levels. The value of liabilities will fall, funding positions will improve and the future will look a lot brighter for defined benefit schemes.
There are a number of reasons why this desired state of affairs may take longer to arrive than most people would like. Whilst it is clearly difficult to make market forecasts (after all if we were good at forecasting the markets we would all have different jobs…), it ...
Tue, 05 Aug 2014 17:30:24 GMT
“Carney tells UK to prepare for rate rises” - Financial Times, June 2014.
The general consensus is that the Bank of England (BoE) will increase base rates early in 2015 (or maybe even sooner). This is an increase in interest rates, which is good for Defined Benefit (DB) pension funds right? Not necessarily. A rise in the base rate is not a guarantee that the value of pension fund liabilities will fall.
Why are interest rates important for DB pension funds?
DB pension funds have to make pension payments to their members in the future, these are known as the fund’ ...
Wed, 30 Jul 2014 15:31:51 GMT
Last week’s announcements on how the Government plans to implement its new rules on annuities mark a seminal moment in the on-going pension revolution. Some necessary flesh has been now added to the bare bones of the Budget bombshell that savers in DC schemes would no longer have to convert their pension pots into annuities. But at the start of most revolutions, it is usually hard to predict where they will end. This is particularly true of this one. What seems to be clear, however, is that if this revolution is to lead to greater incentives to save (which should perhaps be the r ...
Tue, 29 Jul 2014 17:07:38 GMT
What does running a successful lab experiment have in common with managing a pension scheme to full funding?
The final hurdle of my biochemistry degree was a 10,000 word report on the results of a 2 month lab project. The aim of the project was to identify the role of an unknown protein, in a newly discovered cellular system, in a mildly contagious strain of Escherichia. Coli. A hard task! Not least because there are thousands of reagents and hundreds of experiments that could lead down a path of years of work with no guarantee of achieving any useful results. I only had 2 months and my ...
Mon, 21 Jul 2014 14:28:04 GMT
Early July, BT announced with great publicity that it executed a £16bn longevity hedging deal with Prudential Insurance Company of America.
It is easy to get caught up in the media hype and “heat of the moment reactions” on this mega deal. However, from my time as CEO and CIO of Invensys Pension Scheme, it became clear that trustees need to ask the right questions to find the right solutions for a particular scheme. With this in mind, I try to put myself in the shoes of a pension fund trustee director and wonder: “What questions should I, trustee, ask my advi ...
Tue, 15 Jul 2014 12:41:06 GMT
With the Global Financial Crisis (GFC) firmly entrenched in our memories, credit spreads tightening and the rate cycle set to turn, one can understand investors insatiable appetite for absolute return strategies especially when investing in global fixed income markets. Whilst this is not a new idea it remains a relatively immature peer group, with many interpretations and many funds that are not really delivering absolute returns.
Fixed income management has changed significantly over the years. Going back more than ten years most managers offered traditional 'long-only' ...
Thu, 10 Jul 2014 13:24:24 GMT
There has been a flurry of activity in the longevity swap market over the last 12 months culminating in the mammoth £16bn transaction announced in July 2014 between the BTPS and Prudential. We appear to be seeing a big increase in the size of individual deals, as well as the overall number of deals. Why is this?
- Anecdotally there are more firms willing to supply longevity hedging cover into the market, meaning that it has become more feasible for large (£5bn+) schemes to contemplate a transaction. Once ...
Mon, 30 Jun 2014 15:48:57 GMT
Have you ever thought of the perfect retort, but only done so too late to actually use it? The French have a phrase – l’esprit d’escalier (literally, the wit of the staircase) to describe just this predicament, yet we don’t have an obvious equivalent in English. In a similar vein Korean has a word, nunchi, to describe the intuitive ability to gauge how people are feeling, and to know what not to say. Angdai, in Hindi, refers to the lazy morning stretch you do when you wake up in the morning. However my favourite word that English could really use has to be t ...