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W W W. W A T S O N W Y A T T. C O M University of NSW 23 September 2002 Guest Lecture John Ferraro James Fitzpatrick
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Agenda Asset Liability Modelling (ALM) Working at Watson Wyatt - James Fitzpatrick - John Ferraro Please interrupt if you have a question
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The “Problem” A Trustee’s superannuation fund has lost 10% over the last few years due to poor investment markets. With the coverage of assets over liabilities now at only 100%, further losses will mean that the Fund will be under-funded. The “Problem”: the Trustee has asked for strategic advice to minimise the chance that the Fund’s coverage of liabilities falls further.
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The Solution The Trustee can benefit from an ALM What is an ALM? Why is it needed here? - stochastic model versus deterministic - identifies risk The solution might mean a new strategy
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Steps in ALM Setting asset assumptions Setting asset allocation strategies Building the liability model Running simulations Interpreting results
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Asset Assumptions Global framework/model Returns, standard deviations and correlations: - Australian equities - International equities - Australian fixed interest - Listed property - Direct property - International fixed interest - Cash - Inflation, and more ……
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Asset allocation strategies The Strategy is the long term weight or allocation to each asset class Example: Australian equities 30% International equities 30% Property 10% Australian fixed interest 15% International fixed interest 15%
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Liability Model Actuarial input useful for superannuation funds Imitate actuarial valuations in calculating contribution rates under each scenario Conflict: Actuarial (prudent) versus ALM (best estimate) assumptions
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Running Simulations How many is enough? 5000? Platform? Watson Wyatt uses Excel/Visual Basic Data stored in Access tables Complex funds can take a number of hours to run
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Interpreting Results Results need to be interpreted and presented to the client Recommendations may (and usually) do mean a change in strategy Examples of results:
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Example 1: Return Definition? Vested Benefits Index
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Example 2: Risk Definition? Probability of under-funding
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Graduated in 2000 with a Bachelor of Commerce majoring in Actuarial Studies Joined Watson Wyatt in 2001 in the actuarial practice Work in client teams helping Trustees: - actuarial valuations - group life reviews - ad hoc problem solving (eg legislative changes) Working at Watson Wyatt – James Fitzpatrick
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Working at Watson Wyatt – John Ferraro Joined Watson Wyatt in 1994 Worked in a number of departments: - IT - IT/Administration - Superannuation Consulting - Investment Consulting Currently provide investment advice to Trustees on strategy, manager selection and monitoring.
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