Pension funds, prepare for crisis

The 2008 financial crisis indicated the limitations of the Asset Liability Management models used to advise pension funds. The huge losses on the invested portfolios of pension funds were so unlikely according to the ALM model that they were deemed impossible. Combined with a very low interest rate huge drops in the coverage ratio of pension funds were realized, resulting in public disturbance. In this research a new method is proposed which includes a future crisis period within the investments. In this research the Asset Liability Management Including Crisis for Assets Returns (ALMICAR) model is proposed, which incorporates crises periods within the existing Asset Liability Management (ALM) framework. In this way the ALMICAR model allows to incorporate a crisis directly into the decision making process for future investments of pension funds instead of using separate stress scenarios to evaluate the impact of a crisis. A comparison between the ALMICAR and AEGON's ALM model is made. The research shows that the simulations for future returns made with the ALMICAR model are more realistic than the simulations from AEGON's existing ALM model. As a result, pension funds are able to make more informed decisions on their investments.