1. 23 September 2002 Guest Lecture John Ferraro James Fitzpatrick
University of NSW
23 September Guest Lecture
John Ferraro
James Fitzpatrick

2. Agenda Asset Liability Modelling (ALM)
Working at Watson Wyatt - James Fitzpatrick - John Ferraro
Please interrupt if you have a question

3. 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.

4. 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

5. Steps in ALM Setting asset assumptions
Setting asset allocation strategies
Building the liability model
Running simulations
Interpreting results

6. 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 ……

7. Asset allocation strategies
The Strategy is the long term weight or allocation to each asset class
Example: Australian equities 30% International equities 30% Property % Australian fixed interest 15% International fixed interest 15%

8. 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

9. 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

10. 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:

11. Example 1: Return Definition? Vested Benefits Index

12. Example 2: Risk Definition? Probability of under-funding

13. Working at Watson Wyatt – James Fitzpatrick
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)

14. 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.