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University of NSW

University of NSW. 23 September 2002 Guest Lecture John Ferraro James Fitzpatrick. Agenda. Asset Liability Modelling (ALM) Working at Watson Wyatt - James Fitzpatrick - John Ferraro Please interrupt if you have a question. The “Problem”.

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University of NSW

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  1. University of NSW 23 September 2002 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 10% 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.

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