Serving the pension funds

Given changing demographics and their long-term investment horizon, pension funds have traditionally found it difficult to use standard techniques to manage their assets and liabilities holistically. With markets continuing to be in the doldrums, the future retirement income of millions of people is in jeopardy.

In their hour of need, pension fund managers are calling in the quants to help put asset and liability management on a firmer quantitative footing. Consultants are developing a new breed of dynamic stochastic models to address pension funds’ particular needs, but how do they overcome the shortcomings of more primitive models (view article)? Beyond theoretical advances, technology is also evolving as pension fund managers’ awareness of quantitative risk management increases. Vendors continue to roll out risk reporting and portfolio evaluation products, though some progress towards creating more integrated systems is being made (view article).

Pension funds are now more commonly using inflation-linked derivatives as part of their liability management (view article). According to one dealer Risk spoke to, around €1.5 billion worth of inflation-linked swaps traded across just a single broker in the first two weeks of January. This is more than double the amount traded across the entire broker market in June 2002.

While investors such as pension funds are becoming more sophisticated in their management of market risks, even a basic quantitative understanding of operational risk is beyond most investors’ current reach. HSBC’s François Longin and Gautier Martin take a closer look at the operational risk that accompanies fund valuation (view article) and develop a quantitative framework.