Strategic asset allocation is one of the key decisions for trustees since small changes in the asset allocation can have a significant impact on the long-term performance of a pension fund. One of the key inputs in strategic asset allocation decisions is the information produced by the consultant’s asset liability model. This information helps trustees understand how any particular portfolio is expected to perform and assists them in deciding how much to invest in different types of assets. This is true whether a fund is using a static strategic asset allocation, dynamic de-risking or fiduciary management approach.

The Asset Liability Model Monitor will enable trustees, for the first time, to understand how the asset liability model of their consultant performs and use this information to improve their decision making. The service benchmarks the output of a consultant’s asset liability model against similar models at other firms. As a result trustees are able to understand how their consultant’s model is performing and, consequently, are better equipped to challenge their consultant on this key information. Any anomalies that may exist in the models output can then be quantified and factored into trustees strategic asset allocation and de-risking decisions.

Roger Brown, founder and director of IC Select, said, “Knowledge about how the asset liability model is performing will enhance trustees’ decision making and lead to a step shift in governance for their scheme.

We had thought that the difference between models would be small, but this is not the case. For example, we have found that to achieve an expected return of 4.5% over ten years, one firms model indicates that a portfolio invested 20% in growth stocks is appropriate whilst the model at another firm requires almost 80% of the fund to be invested in growth assets. These are not trivial differences in strategic asset allocation and the implications of these differences are hugely significant for pension funds. It is vital trustees are aware of how their investment consultant’s asset liability modeling can affect their strategic asset allocation.”

The Asset Liability Model Monitor also allows larger pension schemes, that use in-house models, to benchmark their models to ensure they are not producing extreme results that could adversely influence decision making.

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For further information please contact:
Roger Brown, founder and director
0131 221 6505
roger.brown@ic-select.co.uk

IC Select, Forth House, 28 Rutland Square, Edinburgh EH1 2BW
Website: www.ic-select.co.uk
Tel: 0131 221 6505, Fax: 0131 221 6506.

Notes to Editors:

IC Select specialises in helping pension funds monitor and review investment consultants and fiduciary managers. As a result, trustees can be more confident in the quality of their investment decisions and are able to enhance their scheme governance.

Differences between asset liability models are significant. The following chart illustrates the difference in output for different portfolios from two consultant’s models.

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