Your SlideShare is downloading. ×
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Our Experience on Public Pension Fund Management
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Our Experience on Public Pension Fund Management

676

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
676
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
7
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Pension Fund Management “ IBRD’s experience” Sudhir Krishnamurthi The World Bank Public Pension Fund Management, Washington, DC 24 September, 2001
  • 2. Road Map
    • Introduction
    • Governance of Pension Plans
    • Strategic Asset Allocation
    • Middle Office Issues
      • Performance and Risk Measurement
  • 3. IBRD (World Bank) Investments
    • IBRD
      • $55 billion liquidity
      • Managed internally
      • Many instruments
    • Pensions
      • $10 billion for Pension and others
      • Managed externally
      • Many asset classes
      • Provide Financial Technical Assistance
  • 4. Financial Instruments
      • Fostered innovation in supporting services
    IBRD Pensions
    • Futures & Forwards
    • Swaps
    • Interest Rate
    • Currency
    • Structured
    • Other Synthetic Products
    • Bonds - issuance & trading (incl. EMG)
    • Equities
      • US
      • Non-US
      • EMG
    • Other
      • Hedge Funds
    • Private Equities (EMG)
    • Real Estate
    • Fixed Income
      • Global
      • High Yield
      • EMG
  • 5. Fund Governance
    • Macro Governance
      • Oversight Structure
      • Responsibilities
    • Micro Governance
      • Delegation of Authority
      • Conflict of Interest
    • Cost of Governance
    • Governance of country systems
  • 6. Governance
    • Why Governance
        • Owner of assets  Principal
        • Manager of assets  Agent
      • In a principal/agent relationship, principal has to ensure agent is acting in his best interests
  • 7. Governance
    • Who needs to be Governed
      • Pension investment groups, fund managers
    • Who does the Governing
      • Ideally, the principals or pension beneficiaries
      • Usually, a representative body like the oversight committee or regulators
      • Clear distinction between governing and governed bodies
  • 8. Governance Organization Structure Equities
    • oversight
    • benchmark
    • guidelines
    • monitoring
    Governing Body Governed Body Currency Private Equities Cash Real Estate Fixed Income Oversight Committee Investment Staff/External Managers
      • The Regulators take role of Oversight Committee in DC plans
  • 9. Governance Macro Issues
    • Composition of Oversight Committee
      • Selection method
      • Size
      • Representation
      • Turnover
      • Frequency of meeting
    • Responsibilities of Oversight Committee
      • Select investment staff and external managers
      • Set Investment Policy
      • Oversee Investment Policy Implementation
      • Monitor Investment Performance
      • Overall Fiduciary Responsibilities
  • 10. Governance Macro Issues
    • Composition of Investment Staff
      • Finance Professionals
      • Accountants
      • Quantitative Specialists
      • Actuaries
    • Responsibility of Investment Staff
      • Funding Recommendations
      • Investment Management
      • Risk Management
      • Reporting
  • 11. Governance Micro Issues
    • Delegation of Authority
      • Explicit and written
      • Implementation of Investment Policy
    • Conflict of Interest
      • Permissible and Non-permissible transaction
      • Disclosures
      • Code of Ethics
      • Responsibility for the Development of Investment Policy and
      • its Implementation be separated
  • 12. Governance Cost of governance
    • Delays
    • False sense of comfort - especially if oversight committee is not paying attention.
    • Cost of providing adequate information to oversight committee/regulators.
    • Ensuring timely/appropriate feedback on decision to oversight committee/regulators.
      • Governance must be just right - not too little and not too much
  • 13. Governance Country Systems Provident Fund (PF) Individual Provident Fund Oversight Committee NO Defined Contribution (DC) Individual Fund Manager Regulators YES Defined Benefit (DB) Government Government Social Security Administration YES Agent Oversight Incentive compatible Principal
  • 14. Investment Decisions Decision 1: Determining asset allocation policy mix (Strategic Asset Allocation) Portfolio construction & manager selection Tactical Asset Allocation Decision 2: Decision 3:
  • 15. Importance Investment Decisions Sources of Long-Term Performance Source: Brinson, Hood & Beebower. “Determinants of Portfolio Performance” Financial Analysts Journal. May/June 1991. Note: Cross products account for 2.1% of the variance Tactical Asset Allocation 1.80% Other Factors 2.10% Security Selection 4.60% Strategic Asset Allocation 91.5%
      • As much as 91.5% of performance attributed to Strategic Asset Allocation
  • 16. Assets and Liabilities Liabilities are unique for every pension plan Pension fund assets, in $ billions, annually Ratio of assets to liabilities, annually Note: Figures include a majority of private pension plans (45,000) Source: Pension Benefit Guaranty Corp. U.S. Pension Funds: 1980-1996
      • Liabilities are the only reason for a pension plan to make investment choices
  • 17. Mean - Variance Efficient Frontier 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 5.00% 7.00% 9.00% 11.00% 13.00% 15.00% 17.00% 19.00% 21.00% Risk - Standard Deviation Return - Mean Traditional approach to Strategic Asset Allocation Market Portfolio Capital Market Line Asset Allocation Risk Tolerance determines Asset Allocation
      • Is standard deviation meaningful as risk tolerance measure for pension plans
  • 18. The Pension Problem Asset and Liability matching problem LIABILITIES ASSETS
      • Traditional asset allocation approach does not take liabilities into account
    • Yearly Outflows
    • Current retirees
    • Future Outflows
    • Future retirees
    • Yearly Inflows
    • Contributions
      • Employees
      • Employer
    • Return on Assets
    Current Assets
  • 19. Risk measures for Pension Plans
    • Pension Plan investors have many other risk measures besides standard deviation of expected returns.
    • The appropriate risk measures for pension plans depends on the parties that are involved in the decision making process.
  • 20. Different objectives Objectives of parties concerned with pension plans PENSION FUND Source: Ortec Consultant BV
      • Objectives dictates the risk measures and risk preference
    PLAN SPONSOR Low and stable contributions REGULATING AUTHORITIES Solvency requirements EMPLOYEES Maintaining pension scheme CENTRAL GOVERNMENT Reduction public pensions RETIREES Maintaining compensation cost of living
  • 21. Objectives and Risk Measures World Bank’s Pension Plan Maximize Return (max. wealth of plan) II. Avoid high contribution rate levels I. Avoid low funded ratio levels (ratio Asset to Liabilities)
      • Risks: I. Low funded ratios II. High contribution rates
  • 22. Mean - Variance Efficient Frontier Risk Return - Wealth Asset Liability Management approach to Asset Allocation Market Portfolio Asset Allocation
    • Risk (as measured by st. dev.) determined by:
    • Maximum Contribution Rate
    • Minimum Funded Ratio
      • Asset Allocation reflects risk bearing capacity of the pension plan
  • 23. Operationalize Risk Measures
    • 5% Funded Ratio - at - Risk
      • Minimum funded ratio that can occur in any year with a 5% probability
    • 5% Contribution Rate - at - Risk
      • Maximum contribution rate that can occur in any year with a 5% probability
    Variants of the value-at-risk concept
      • Use multiple years for calculation of these risks (in this example 10 years)
  • 24. Investment Decision Matrix Total allocation to risky assets 60% 60% 60% 60% 70% 70% 60% 80% 80% 90% 80% 85% 5% FUNDED RATIO - AT - RISK 19% 25% 22% 5% CONTRIBUTION RATE - AT - RISK
      • Risk budget to these value-at-risk measures determines investment policy
  • 25. Investment Decision Example Budget: Funded Ratio-at-risk = 85% and Contribution Rate-at-risk = 22% 5% Contribution Rate-at-risk 5% Funded Ratio-at-risk 92.5% 14% 87.5% 82.5% 22% 30% 18% 26% 90.0% 85.0% 60% 80% 70% 70% allocation to risky assets
      • Shaded area shows investment policies which are conform with risk budget
  • 26. Middle Office Issues
    • Contracts
    • standardized
    • adequate protection
    • Guidelines
    • development
    • compliance
    • monitoring
    • Performance
    • Measurement
    • frequency
    • attribution
    • Accounting & Reporting
    • management
    • internal
    • Controls
    • risk management
    • cash management
    • local/global custody
      • For each external manager and entire portfolio
  • 27. Why Risk Management and Performance attribution
    • Identify unsustainable downside risk.
    • Identify the sources of excess return
    • Support asset allocation by trading off risk and return.
  • 28. Sizes of Risks Value - At - Risk Tree Liabilities Investment Benchmark Extended Policy 1,809 128 168 192 1,776 Actual Portfolio  = - 0.45  = - 0.36 $, million
      • Asset Liability Risk is main risk and is taken by the oversight committee
  • 29. TAA and Active Risk
      • Risk measured as tracking error against the strategic benchmark
    177 TOTAL RISK 83 TAA - Risk 125 Active - Risk 40 Equity 45 Fixed Income 60 Others 100 Equity 20 Fixed Income 50 Others 10 US - Equity 120 Non US - Equity 15 High Yield 10 Global FI 0 Real Estate 50 Hedge funds 55 US - Equity 45 Non US - Equity 30 High Yield 7 Global FI 100 Hedge funds 15 Real Estate
  • 30. Monthly Performance Attribution
      • Performance in same format as risk enables evaluation of risk and return
      • of each investment decision
    50 TOT. PERFORM 15 TAA-PERFORM 35 Active-PERFORM 20 Equity 5 Fixed Income -10 Others 25 Equity 5 Fixed Income 5 Others 10 US - Equity 15 Non US - Equity 5 High Yield 0 Global FI 0 Real Estate 5 Hedge funds 15 US - Equity 5 Non US - Equity 0 High Yield 5 Global FI -20 Hedge funds 10 Real Estate

×