1. Introduction to Asset Liability Management (ALM)
University of Waterloo| November 2017

2. Introduction Pieter Wijnhoven Senior Vice President

3. “Career” 2000: Started studying Technical Mathematics (TU Eindhoven)
2001: Switched to studying Econometrics (University Maastricht)
2004: Internship at ORTEC USA (Atlanta) - Logistics
2005: Graduated
Life after studying
2005: Business Analyst / Consultant at ORTEC Finance (Rotterdam)
More studying (!)
2006: Post graduate study:
Financial Investment Analyst (“VBA”, VU Amsterdam)
2010: Senior ALM consultant:
Projects for Amitim (Tel Aviv), HOOPP (Toronto), OMSL (Bermuda)
2012: Senior Account manager
2015: Lead Consultant / Business Development
2016 1st of January: Opened Ortec Finance Canada

4. “We help people to manage complex investment decisions”
Ortec Finance company profile
Ortec Finance is a global provider of technology and advisory services for risk and return management. Established in Rotterdam in 1981, Ortec Finance today has over 150 employees who combine mathematical ability, business awareness and practical application to deliver innovative and pragmatic solutions. Our client base operates in the pension, investment management, insurance, municipal, housing corporation and private wealth management markets, and is long-standing and global. The business of Ortec Finance is to improve investors’ decision making and decision monitoring. We design, build, and apply solutions for asset-liability management, performance measurement & risk attribution, and financial planning. Our solutions derive from the combination of software models and professional advisory services. Through close collaboration with the academic community we remain at the forefront in innovation.

5. Our Solutions Strategic Risk Management Services Consulting Software
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Our Solutions
Strategic Risk Management
Investment Performance Services
Risk Monitor Reporting
ALM studies
Investment Consulting
Services
Consulting
GLASS for ALM and Risk Monitoring
PEARL for Performance Measurement & Attribution
Local installation or SaaS
Software

6. Our Global Offices and Clients
Rotterdam
Netherlands
Amsterdam
Netherlands
Toronto
Canada
Hong Kong
Asia/Pacific
London
United Kingdom
Pfäffikon
Switerzland
Europe

7. Introduction to Asset Liability Management (ALM)
University of Waterloo| November 2017

8. ALM = Asset / Liability Management = Balance sheet Management
Pension funds
ALM = Asset / Liability Management = Balance sheet Management
Funding ratio =
Assets
Pension liabilities
Surplus/Deficit

9. ALM decision making problem: objectives / uncertainties / policy instruments
Holistic ALM:
risks of all stakeholders
result: fair pension deal
risk
return

10. Methodology ALM / scenario analysis
ALM-system “GLASS” consists of:
Actuarial model: generates cash flows / liabilities
“Policy” model: contribution, indexation and investment policy
Econometric model: generates economic scenarios

11. Pension fund: Liabilities
Actuarial simulation of individual participants (mortality, career, etc)
Valuation of the total pension liabilities:

12. Pension Liabilities Two main approaches: Fixed discount rate, say 4%:
Fair value, Economic Value

13. Indexation and contribution policy
Indexation Contribution

14. Investment policy
Strategical asset mix:

15. Scenario analysis: Generating scenarios
ALM-
model
Scenario 2
Scenario 3
past
present
future
time

16. Scenario analysis: Evaluating ALM-policies
time
present
past
future
A L S
Contr
pensions
Analyser
ALM-
model
Sc 1
Sc 2
Sc 3
policy
Contr
pensions
Contr
pensions
Contr
pensions
Contr
pensions

17. Scenario Analysis Approach
a possible outcome or future development of uncertain factors
Scenario Set
a large number of individual scenarios representing the uncertain future
Risk Management
testing a selected strategy against a number of different futures
Management Flight Simulator
Managerial Learning
Enable management to acquire more knowledge about the dynamics of their business, and how it may respond to various circumstances
Consensus
Because they record explicit assumptions about the future, and provide a common framework for discussion, they also contribute to a better understanding between managers

18. Interactive econometric methodology
Historical time series
of inflations, interest rates & asset returns
MODEL ESTIMATION
Own views and
sensitivity analyses
All scenarios
Individual scenario
Average
SIMULATION
Scenarios
of inflations, interest rates & asset returns

19. 10 year bond yields Funding Ratio
Scenario Modeling
10 year bond yields Funding Ratio
Yellow : 2000 scenario’s
Blue: 1 scenario
Red: Average
Scenarios concerning
uncertainties
Output
Pension fund model
Policy variants

20. Investment policy: Asset mix
Risk vs return trade-off: “Equities versus Bonds”
More equities: 1. 2. 3.
Fixed income
Probability of return
Equities
Equities 3. 1. 2.
Return
Due to correlations effects, combinations of different investments can lead to more efficiënt risk-return trade-off than the investments separatly (diversification).

21. Policy instrument: Duration matching
Expected future pension payments
The cash flows 1, 2, … are discounted with the fluctuating market interest rate. Low interest rate
The market value of the liabilities is therefore sensitive to interest rates. This sensitivity depends on the average maturity of the cash flows. Average: 15 years
Investments are also sensitive to interest rates. The average maturity of bonds is 5 years.
There exists a mismatch between assets and liabilities, because of the different impact of a change in interest rates

22. Investment policy: Duration matching
Fixed income (FI)
Equities (EQ)
120
Liab
Surplus
Funding ratio = 120%
Starting balance sheet
Fixed income: duration = 5
Liabilites: duration = 15
Interest rate decrease with 1% FI EQ
Liab
Surplus
“duration match FI”
Funding ratio = %
“duration mismatch” FI EQ
Liab
Surplus
Funding ratio = %

23. Investment policy: Duration matching
Fixed income (FI)
Equities (EQ)
120
Liab
Surplus
Funding ratio = 120%
Starting balance sheet
Fixed income: duration = 5
Liabilites: duration = 15
Interest rate increase with 1% FI EQ
Liab
Surplus
“duration match FI”
Funding ratio = %
“duration mismatch” FI EQ
Liab
Surplus
Funding ratio = %

24. Investment policy: Duration matching
Initial Funding ratio = 120%
Interest rate decrease with 1%
“duration mismatch”
“duration match FI”
Funding ratio = %
Funding ratio = %
Interest rate increase with 1%
“duration mismatch”
“duration match FI”
Funding ratio = %
Funding ratio = %
Duration matching HELPS in case of decreasing interest rates, it does NOT HELP in case of increasing rates.

25. ALM-study: results

26. ALM-study: results

27. Finally…
Questions?

28. Pieter Wijnhoven Senior Vice President 647 640 7400
250 University Avenue, Toronto

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