We discovered that the board-designated assets and pension were being managed with the same investment framework despite significantly different liability streams. In the case of the board-designated assets, the client was paying out a fixed rate plus inflation each year to meet operating expenses. In the case of the pension, assets were being invested to match growing liability streams. However, the risk/return profile and investment horizon of the assets and liabilities in the pension were mismatched.
By leveraging our risk modeling and analytic capabilities, we discovered the following trends:
Pension – Our analysis showed a significant mismatch in the interest rate sensitivity of the client’s asset and liabilities. Using the client’s actuarial reports, we were able to project the client’s future liabilities for the next 60 years.
Board-designated assets – We examined the client’s portfolio using risk factor analysis to understand the true drivers of return. The data suggested a majority of the client’s portfolio volatility was driven by a growth fund, despite being diversified across asset classes.
Self-insurance pool – Based on our analysis of historical payouts for medical malpractice, this asset pool could afford to take on more risk through further diversification.
Below shows the transition of the pension asset pool to a customized LDI (liability-driven investing) model: