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Impact Investing

IPE special report May 2018

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ALM step to prudent man rule

New legislation will allow Swiss pensions funds employing asset liability management (ALM) more freedom, in that they will no longer have to follow official investment guidelines. Although details of the legislation have yet to be published, the legal restrictions will continue to affect other schemes.
“This is a remarkable step toward prudent-man rules,” comments Werner Nussbaum, president of Innovation Zweite Säule, an association that wants to broaden discussion about topics related to pension schemes, mainly through an international approach. “ALM will set the standard for all pension funds that are managed economically and that wish to take advantage of their enlarged freedom.”
Self-responsibility will become more important, agrees Werner Strebel, a partner in advisers PPCmetrics. According to his estimates, two thirds of independent managed funds have already introduced asset liability studies to some extent. Most smaller funds use this approach for the investment side only, while 45% of bigger funds, with assets over Sfr500m (e312m), do so.
Given the connection between benefits, contributions and returns, asset as a tool for defining investment strategies and to structure the decision-making process, says Strebel.
In 1990, when Bernische Lehrerversicherungskasse replaced its account book strategy by an actively managed investment strategy, ALM played an important role, says Bernische director Hans-Peter Sieber. Since then, the still conservatively financed scheme doubled its annual return on investments from 4% to more than 8%. The difference corresponds to an additional return of Sfr870m.
“ALM helped to develop scenarios and to plan the investment process,”says Sieber. In addition, especially for public funds like the Lehrerversicherungskasse, asset liability studies play an important role in external communications with politicians. But, looking back, the studies done at that time were based on many assumptions that turned out to be inaccurate, Sieber adds. These assumptions were not only related to the investment side – expected returns and volatility – but also to membership, life expectations and invalidity.
Berner Lehrerversicherungskasse is one of the very few Swiss pension funds introducing stochastic models, which should help them calculate downside risk, given that the scheme is currently underfunded and its deficit is a contingent liability of the canton of Bern. Erich Solenthaler

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