Pension Funds under Pressure

Due to new regulations of the Financial Assessment Framework (FTK), the importance of ALM analysis has increased. The FTK focuses on the coverage ratio, which is a ratio that expresses the financial position of a pension fund. The coverage ratio represents the total value of the assets divided by the total value of the liabilities. Regulations prescribe that the coverage ratio should not be lower than 100% with a 97,5% confidence level in one year time. This is also called the 2,5% Value at Risk. This 2,5% Value at Risk, which is prescribed by the FTK has several drawbacks. That is why the differences between this risk measure and another one which should not suffer of the same drawbacks (Expected Shortfall) has been examined. An ALM model has been build using a VAR model to capture dependencies between macro- economic variables, which have an influence on the solvency of a pension fund. Interest rates have been modelled within a Nelson-Siegel framework. Many different scenarios can be examined using this model and the impact they have on the different risk measures. This research paper has investigated the influence of different shocks, scenarios, portfolios and risk measures to show what the influences are of these elements on the stability and more importantly solvability of a pension fund. It turns out that especially the long term returns of the assets are very important for the stability and solvability of a pension fund in the long run. The differences between the two risk measures are not that high. Both risk measures suffer from one major drawback, which is that both risk measures only take historical information into account. Elaborate stress testing and a well diversified portfolio are very important for a pension fund. ALM scenario analysis plays a very important role in this as it can identify certain risks and test the robustness of a pension fund under different possible future states of the world.