Modeling process

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The best ALM studies are developed using sound processes. We employ time-tested systems and methods at each step in our studies. These processes are bolstered by a rigorous review of the results. The resulting analysis provides our clients with a clear understanding of how their plans function under many different economic conditions and the confidence to know that the results were determined in a logical, proven manner.


Our analysis will be tailored to our clients' specific circumstances, liability characteristics, and financial objectives. It will provide an understanding of the tradeoffs between minimizing the volatility of contributions and maximizing returns to reduce the long-term cost of the plan. We employ a risk-budgeting framework that will help our clients identify the appropriate level of risk and the optimal allocation of risks to be taken.

Some of the key metrics used to quantify financial risks when determining the optimal investment policy for a corporate pension plan are as follows:

  • Expected long-term compounded growth rate of assets – will long-term asset growth be sufficient to achieve funding goals at an acceptable cost?
  • Funded ratios – assets/PPA funding target and assets/PBO – measures volatility and probability of achieving fully-funded status on PPA and financial accounting basis.
  • Tracking error vs. liabilities – measures volatility of expected asset returns vs. market-based growth rate of liabilities.
  • Cash funding requirements – the dollar level and likely volatility of annual cash contributions during the projection period under alternative funding and investment policies.
  • Balance sheet risk – the dollar level and likely volatility of balance sheet surpluses and deficits during the projection period.
  • Accounting cost and volatility – the dollar level and likely volatility of annual net periodic pension expense.

A summary diagram of our asset-liability modeling process is shown below.

Next: Real-time data and tools for managing volatility »

Next steps