INTERVIEW OF THE CEO OF THE UNJSPF REGARDING THE ALM STUDY
We understand that the ALM study has recently been completed and that its results are going to be presented to the Pension Board next July. Is this correct?
Yes, this is correct. Funding for the first comprehensive asset-liability management (ALM) study was approved in 2005 by the Standing Committee as part of the Fund's 2006-2007 budget appropriations. On this basis, the Fund retained the services of two specialized consulting firms (PCA/EFI) to conduct the ALM study. The study was completed in April and was presented in May to the Committee of Actuaries and the Investment Committee, who held a joint meeting dedicated to it. The study, together with the observations and recommendations of these Committees, is going to be presented to the Pension Board during its next session in July.
What exactly is an ALM study and why is it important for the Fund?
An ALM study is a coherent, disciplined way of generating very long-term projections of the Fund's future estimated liabilities (benefit payments) and assets (contributions and investments), and of integrating both in order to be able to make informed decisions as to the plan's design or its investment policy. As you know, this is the first time that the Fund has done such a study, although already in 1994 benefit payouts began exceeding incoming contributions which is a clear sign of a maturing Fund. In 2000, the Board recognized this and concluded that it was important to look closely at the interaction of assets and liabilities.
The Fund has grown considerably during the past decades; it now covers some 155000 participants, retirees and beneficiaries from 22 member organizations. Fortunately, the Fund's assets have also grown and currently amount to close to 40 billion US dollars. Naturally, the complexity of managing this multi-member organization has also increased. Consider for example, the complexity of the payments operations. The Fund pays annually 660,000 benefits in 190 countries and in 15 currencies. The Fund also provides a two-track feature which means that it has to manage payments that vary according to different local inflation and currency exchange movements.
In order to keep the "pension promise" for the current and future generations, the Fund's managers and governing bodies need to continually assess the interplay of these and other factors, in order to come up with an optimal investment policy and a sustainable plan design. An ALM framework allows the Fund to anticipate and quantify possible future events. Without it, it would be very difficult to deal with the related risks and complexity and to develop optimal policies.
What are the ALM's conclusions relative to indexation, in particular with the project to index the North-American equity portfolio?
The ALM has a strategic focus. That is, it focuses on helping managers and governing bodies to establish the appropriate policies. The decision to index or not, is a tactical one. Therefore, the scope of the study did not cover this issue. However, what the ALM did review is the current asset allocation. That is, the policy decision as to how much of the portfolio should be in each of the main asset categories, or asset classes as they are commonly defined. The ALM results confirmed that the current asset allocation (60% equities, 31% bonds, 6% real estate and 3% in short-term investments) is sound, but it also established that it may be improved marginally.
Could you comment on the ALM's main conclusions and the recommendations being made to the Pension Board?
First of all, the ALM provided a set of very good news. It confirmed that the Fund has a sound actuarial process; that its asset allocation is sound; that the Fund is stable and well-funded; and that its funding ratio (available resources divided by current commitments) will approximate 100% in the foreseeable future, even considering pension adjustment costs. This is obviously reassuring to current and future participants and retirees as well as other stakeholders. Second, the ALM noted the complexity of the plan design. It reviewed the potential impact of some of its features (such as the two-track) and concluded that these add considerable volatility or uncertainty in the long-term estimate of the Fund's financial position. It also noted the increasingly important role played by the investment of the assets of the Fund in maintaining the Fund's solvency and funding ratio. Third, the ALM identified a set of policy options to be reviewed by Fund's governing bodies which will assist them in establishing the investment policy and assessing potential changes to the plan design. In other words, the roadmap is there, it provides clear indications concerning the objectives the Fund wants to reach; it also proposes possible alternative itineraries the Fund may wish to explore.
So what are the next steps?
Now the Board needs to review the study and consider the comments and recommendations made by the Committee of Actuaries and the Investment Committee. The Board also needs to choose a risk philosophy; determine the asset allocation considering the desirability and convenience of new asset classes; decide if it incorporates the ALM as part of the governance process; and define, if and when, to conduct another ALM study.
Any final comments?
Yes, I tend to agree with the expressed conclusion of the Committee of Actuaries and the Investment Committee that the ALM study is a useful and relevant tool, which complements the Fund's regular actuarial valuation. I also believe that the study demonstrated that the Fund is stable and well funded. However, the study also revealed that due to the Fund's maturing nature and its complexity, it requires an ALM process as part of its governance mechanism. The best way to ensure that the "pension promise" is kept is to continually test and improve the Fund's management and governance framework, and the ALM provided us with such an opportunity.
