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” • 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.
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
Steps in ALM • Setting asset assumptions • Setting asset allocation strategies • Building the liability model • Running simulations • Interpreting results
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 ……
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%
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
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
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:
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)
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.