Exactly ten years ago today, on a cold, grey, autumnal day much like today, a small team of financial engineers pulled off an audacious transaction that changed the art of what, up until then, had been considered possible in the world of risk management for pension plans. I was one of those involved, and this is the story of how it happened.
By 2003, pension funds had begun to feel the effects of an esoteric accounting rule change. Introduced in 2001, FRS17 obliged corporations to recognise on their balance sheets, the impact of wildly volatile deficits in their defined benefit p ...
Active managers have a mixed track record; some have done very well, others significantly less well, and some have simply slipped off the records, unable to generate or retain capital in the wake of poor returns. One thing is reliable, however; if a manager’ performance is consistently better, they are probably doing something consistent. And if they’re doing something consistent, then it should be possible to emulate them.
Explaining managers’ performance is too big a job for one blog; for now I will simply note that a number of people are doing it with some success ...
Alice: Down, down, down. Would the fall NEVER come to an end!
- Alice’s Adventures in Wonderland, Lewis Carroll
Most of us will understand the risks involved when getting into a vehicle... however, if we need to get from A to B and own a car, chances are, we are going to take those risks and drive.
Risk vs. reward is the fundamental principle behind investing; the reward in investment returns is weighed against the risk of losing some or all of the initial investment. When entering the market, sensible investors make a conscious decision on ...
The Bank of England’s new governor is not afraid to shake things up. Can Carney leave his mark by helping the UK return to robust growth with low and stable inflation?
Since taking the helm at the Bank of England (BoE), Mark Carney has implemented some noteworthy changes:
Forward guidance: to promote transparency in its policy, BoE has outlined unemployment thresholds alongside inflation caveats which would prompt a discussion on removing monetary stimulus. Click here for more information.
Easing and widening liquidity facilities: in an effort to promote growth ...
Dawn hasn’t broken, the morning is dark. We climb into the boat. The air is cold, our all-in-one lycras are proving too thin, and the wind is biting at our backs. This is a time when we all question our motives – are we stupid, misguided or mad? What are we doing here, when we could be in bed?
We take up our blades, shiver, and settle into our familiar seats. A contagious nod amongst the crew members signals the time, and our focus shifts to the cox*.
“Attention!” – Her clear, loud voice signals the start – our postures correct, ...
The challenges facing pension trustees and corporate sponsors are well understood, but the fundamental problem that both sides must ultimately solve is that in order to secure and protect member benefits, deficits have to be repaired before all member benefits are paid out; this is the key ALM challenge facing the UK pensions industry and unfortunately deficits have proven to be a stubbornly intractable problem for more than a decade now.
The good news is that both trustees and sponsoring companies each bring an important and powerful lever to the table to repair deficits. On the one han ...
Intuitively we know that one of the largest single risks facing a defined-benefit pension fund is longevity – that of its members living longer. Techniques exist to quantify this risk, but for several reasons it remains difficult for pension funds to properly “deal” with this risk within their existing framework:
1. It doesn’t feel like a risk when you only observe it every 3 years
While longevity experience (actual vs expected deaths) can be monitored on an ongoing basis, the risk is only really crystallized every 3 years when the scheme actuar ...
Since we last discussed the idea in the December 2012 issue of Outline, we have seen significant developments of the usage of volatility control in constructing benchmarks for equity allocations.
Over the course of 2013, we have:
Worked with banks and clients to develop the principles behind a volatility controlled index, based on the MSCI World and Emerging indices;
Developed a particular volatility calculation methodology, based on exponentially weighted measures (which give declining weight to older observations);
Supervised the execution and impl ...
“If you want to go fast, go alone.
If you want to go far, go together.”
We all work in teams, both within and across organisations, to solve complex issues such as repairing final salary pension deficits or designing better outcomes for DC members. What is clear is that no single person, nor organisation, can solve these issues alone. So there’s a vital need for collective action.
We need teams of trustees, CFOs, advisors, fund managers working together not just as a team but working well as a team. To work well, it is vit ...
“The difficulty lies not so much in developing new ideas as escaping from old ones”
John Maynard Keynes
“Numbers make the world go round”
Gregory’s Girl, 1981
Fifty five is an interesting number. It’s a Fibonacci number and a triangular number (sum of 1 to 10) and the largest Fibonaci number to be a triangular number. It’s also a Kaprekar number: 55 x 55 = 3025, 30 +25 = 55. In accounting and legal circles surviving to fifty-five is a badge of honour. For the thirsty, Timeout rate fifty five as being one of th ...