One of VBV’s main concerns is to be able to provide its members with the minimum yield defined in the Pension Fund Act and not to have to finance a deficit from its own funds. The scheme has therefore developed an in-house proprietary asset/liability management tool, which is able to quantify the risk of failing this guarantee over the next five years. It can calculate the probability of a shortfall, the expected return in the case of a shortfall and the probable deficit resulting from the shortfall for every Veranlagungs- und Risikogemeinschaft (VRG) or investment portfolio. It then aggregates the risk of each individual VRG to obtain the overall risk for the pension fund. The pension scheme also carries out stress testing based on a scenario where the main asset classes (euro bonds, equities) decline sharply. This analysis is performed on a regular basis and is reported to the members of the board as well as to the board of directors.
VBV manages 45 different VRGs, including the VBV-Mitarbeitervorsorgekasse Each VRG uses a different investment strategy and therefore has a distinctive portfolio risk. One of the key elements of quantitative ALM modelling is the integration of actuarial risks and investment risks. An ALM study comprises several stages including liability modelling, which is carried out by analysing the pension plan, the simulation of the pension capital and the calculation of future net cash flows.
VBV typically uses different scenarios to reflect changing economic conditions. In the course of the ALM study, the scheme will define target returns and the probability of meeting these returns and will consider the expected returns, volatilities and correlations between different asset classes. The legal and individual constraints of the optimiSation process and the shortfall probabilities and the underfunding risk will also be taken into consideration. VBV carries out ALM studies for its VRGs on a regular basis. The results are then reported to the members of the board and the members of the investment committee.
VBV has granted mandates to approximately 30 external asset management companies but certain asset classes, such as domestic equities, are managed internally. In order to safeguard members’ assets, all managers are obliged to manage their portfolios according to VBV’s investment guidelines.
The pension fund also has a reporting agreement with each asset manager to ensure that customised reporting takes place. Investment controlling reports, which include a quantitative and qualitative analysis for each mandate, are produced on a quarterly basis. The qualitative analysis considers whether the investment process or the investment style of the manager has changed over time, whether the team members are still the same and whether the portfolio is an adequate reflection of management style. Meanwhile, the quantitative analysis covers performance measurement (both absolute and relative performance), the supervision of all investment guidelines concerning the accepted risk budget (including tracking error and duration) and detailed quantitative figures. A manager that has failed to meet its quantitative and/or qualitative targets for a certain period will be put on a watch list and VBV will terminate the manager’s mandate if the figures do not improve. The results of the investment controlling activities are reported to the members of the board.

The pension fund’s assets are predominantly managed via investment funds, with VBV looking into each investment fund in order to correctly evaluate the risks of individual securities.
To assist this process, the pension scheme has implemented powerful portfolio and risk management software, which enables it to calculate value at risk figures and to run sensitivity analyses. The necessary data for the individual securities in the investment funds is transmitted via the internet from VBV’s Master KAG into the risk management system. Value-at-risk figures and the results of sensitivity analyses are reported to the members of the board.

Highlights and achievements
VBV-Pensionskasse prides itself on being the first Austrian pension fund to have established a state-of-the-art risk management process. As one of Austria’s leading pension funds following the merger of BVP and VPK, it also offers risk management services to other pension funds and institutions using sophisticated risk management techniques and software.
In anticipation of the Austrian legislator’s future requirements in 2006, the pension scheme has established a dedicated team of four people to cover and manage all risks associated with its investment activity. VBV believes that Austrian pension funds require a top-down risk management process at pension fund, VRG, mandate and investment security level.