GLOBAL - Northern Trust is unveiling analytical services for existing custody clients which allows them to create unique liability benchmarking specifically tracking a pension fund's assets, and which will soon allow funds to ‘stress test' their strategies.
Ian Castledine, senior investment risk consultant, EMEA, at Northern Trust, told IPE the first phase of launch will allow each pension fund client the ability to create a unique liability benchmark based on their actuarial assumptions - usually presented to the client every six or 12 months - which is compared with zero coupon bonds, to see whether liability requirements will be sufficiently met.
"This [service] allows the pension fund to load the information about their cashflow on the online portal. The cash flow equates to zero coupon bonds, and we model the liabilities, create the investible portfolio that can be mark-to-market and analyse the return of that liability portfolio against the return of assets," said Castledine.
"Most pension schemes only update the cash flow once or twice a year but the underlying yield curve does change all the time. With an investible portfolio of liabilities which is directly based on the cash flows, pension funds can look at the return of the liability portfolio and compare it with the assets, and analyse any surplus or risk," he added.
The liability benchmarking system has been in testing with Dutch pension funds since 2005, who have fed back on its content to improve the process. Netherlands-based funds were involved in part because many Dutch clients have yet to go down the liability-driven investments route but do have a strict requirement to maintain their liabilities reporting.
Moreover, the shifting fixed income yields have made pension funds more aware of their liabilities. So while assets have been relatively stable in the Netherlands and coverage has been fairly good, they are very conscious of potential problems.
So perhaps more importantly, Northern Trust is close to launching a new online tool for its clients which allows the pension fund to see both its assets and its liabilities collectively in one report, and so they can see the risk and the volatility of the assets.
The online tool is already being used in-house to report to a limited number of US, UK and Dutch pension schemes but we will soon be integrated onto the new ‘Fundamentals' passport tool onto the front end system.
If the market were to fall one or two percent, for example, this scenario could then be figured into the cash flow comparison to assess what impact it would have on its investment returns and long-term liabilities.
Similarly, Castledine suggests clients who have gone down the LDI route and think they have immunised their liabilities could use the new liability benchmarking and web-based analytics tools to see what impact various interest rate scenarios would have on their liabilities.
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