Balancing the pension fund balance sheets GARP Chapter Meeting Janwillem Engel 26 January 2016
Balancing the pension fund balance sheetsGARP Chapter Meeting
Janwillem Engel
26 January 2016
1Cardano Balance sheet management for pension funds
Balance sheet of pension fund
Liabilities: accrued pension rights
Supervisory framework (DNB): focus on what fund ‘promises’
Assets Liabilities
2Cardano Balance sheet management for pension funds
Pension fund ambition
Ambition: correct pension rights for inflation
However, inflation correction only when solvency is sufficient
Still, to be able to focus on ambition: real balance sheet
AssetsReal
Liabilities
3Cardano Balance sheet management for pension funds
Balance between balance sheets
Nominal balance sheet Real balance sheet
4Cardano Balance sheet management for pension funds
Approach: keep it simple
5Cardano Balance sheet management for pension funds
Risk management: three pillars
Human behaviorUncertaintyFocus on dominant risks
6Cardano Balance sheet management for pension funds
7Cardano Balance sheet management for pension funds
Evaluate the extremes
8Cardano Balance sheet management for pension funds
Set the limits
9Cardano Balance sheet management for pension funds
Find the optimal investment policy
10Cardano Balance sheet management for pension funds
Next step: refinement
11Cardano Balance sheet management for pension funds
Robust investment portfolio
Optimal mix between
• Protection of nominal rights ...
• ... without losing sight on real ambition
So investment portfolio
• Does not hedge all interest rate risk ...
• ... but is also reserved in hedging too much inflation risk ... reduce
inflation risk
‘Low rates’,
yes, but more ...
12Cardano Balance sheet management for pension funds
Result: Optimal balance between risk and ambition
Nominal balance sheet Real balance sheet