华信惠悦 - Multi-Year Forecasting of Pension Costs.pptVIP

But What About Next Year?Multi-Year Forecasting of Pension Costs Mark Ruloff FGFOA 2005 Meeting May 17, 2005 Agenda What is the difference between a valuation and a forecast? Reasons for doing a forecast Deterministic forecasts Stress testing with deterministic forecasts Stochastic (Monte Carlo) forecasts Using stochastic forecasts to make an asset allocation decision What is the difference between a valuation and a forecast? Closed versus open group / time frame Current status versus expected status into the future As expected versus “what if” Actuarial liabilities versus economic / market liabilities (what if we want to close the plan) Single figure versus range of results that show the possible downsides i.e. Downside to giving away “excess” returns Reasons for doing a forecast Planning – what should we be aware of? After smoothing in past performance, how bad will it get? How bad can it get in the future? “Probability of ruin” Making decisions – what actions could we take now or later? Plan design Funding policy Asset allocation Actuarial Liability verses Economic Liability Actuarial model is a long term budgeting model with build in smoothing Unfortunately is was also adopted for short term tasks like accounting and minimum funding meant to maintain solvency Flexibility and gaming has caused distrust of figures, plans, and individuals involved including actuaries Also need to look at short term mark-to-market economic liability (like Accumulated Benefit Obligation ABO) Still can have a long term budgeting model as well Deterministic forecasts Based on a single set of assumptions going forward Investment returns of 8%, inflation of 3%, … Annual Return Flat 8.5% MV Assets/ ABO liabilityFlat 8.5% Actuarial Assets/ LiabilityFlat 8.5% ContributionsFlat 8.5% Stress testing with deterministic forecasts What if returns are not what we expect? What if returns average what we expect but are volatile? What if we had the high inflation of the 70’s to early 80’s ag