UK - Stephen Lowe, head of asset strategy at Railpen Investments called for the human component to be considered when pension funds set their asset liability models.

Lowe, who spoke to a conference on strategic and tactical asset allocation techniques, also called for ALM – asset liability modelling - to become “truly integrated: A with L”.

“A better match between assets and liabilities might be hoped for from a good ALM, but this may well come at a cost,” Lowe stated.

“Under current actuarial arrangements, most likely a fudge will be an attractive solution,” he added.

“ALM is not a short-cut and in the end it is all about the human process,” Lowe warned, adding that models depended on inputs. “The inputs to a model are more important than anything else.”

He told delegates: “Inputs should result from human belief.”

He stressed that using ALM in practice was important but often difficult, but also said there was evidence of better understanding of liability risk.

“ALM and optimisation models are potentially very useful aids to decision-making,” but he warned: “They have been crude”.

Too-crude models could lead to “very dysfunctional decision-making”.

Lowe suggested that pension schemes should put other risks into context: “Non-investment risks should be included”.

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