Balancing the pension fund balance sheetsGARP Chapter Meeting

Janwillem Engel

26 January 2016

1Cardano Balance sheet management for pension funds

Balance sheet of pension fund

Liabilities: accrued pension rights

Supervisory framework (DNB): focus on what fund ‘promises’

Assets Liabilities

2Cardano Balance sheet management for pension funds

Pension fund ambition

Ambition: correct pension rights for inflation

However, inflation correction only when solvency is sufficient

Still, to be able to focus on ambition: real balance sheet

AssetsReal

Liabilities

3Cardano Balance sheet management for pension funds

Balance between balance sheets

Nominal balance sheet Real balance sheet

4Cardano Balance sheet management for pension funds

Approach: keep it simple

5Cardano Balance sheet management for pension funds

Risk management: three pillars

Human behaviorUncertaintyFocus on dominant risks

6Cardano Balance sheet management for pension funds

7Cardano Balance sheet management for pension funds

Evaluate the extremes

8Cardano Balance sheet management for pension funds

Set the limits

9Cardano Balance sheet management for pension funds

Find the optimal investment policy

10Cardano Balance sheet management for pension funds

Next step: refinement

11Cardano Balance sheet management for pension funds

Robust investment portfolio

Optimal mix between

• Protection of nominal rights ...

• ... without losing sight on real ambition

So investment portfolio

• Does not hedge all interest rate risk ...

• ... but is also reserved in hedging too much inflation risk ... reduce

inflation risk

‘Low rates’,

yes, but more ...

12Cardano Balance sheet management for pension funds

Result: Optimal balance between risk and ambition

Nominal balance sheet Real balance sheet