Support for the Improvement of the Governance Budget of the Pension Fund Supreme Body in their Risk Management Tasks

The Swiss social security system is a three-pillar system. The 2nd pillar (i.e. occupational pension funds) includes only occupational provisions offered by the employer firm. The pension fund supreme body is responsible for its overall management and has according to the law (Art. 51a BVG/LPP) many non-transferable and inalienable tasks. The supreme body should design, monitor and control the management of assets and liabilities in a manner that is appropriate to earnings and risks. In Switzerland, the membership in the supreme body is not a full-time job. However, the scope of their duties is enormous and the fulfilment of the legal requirements (Art. 51a BVG/LPP) needs a lot of time and expertise.

The asset liability modelling (ALM) that offers additionally second opinions to forecasting results with different approaches helps the pension fund supreme body make their definite decisions in risk management and improve their governance budget level. Taking into account that the investment strategy is designated as a third contributor which additionally should sufficiently finance pension fund benefits, the asset management process and correct forecasts of the pension liabilities should help to understand if plan benefits could be financed or should be reduced.

According to the Swiss SKPE FRP5 Guidelines, the threshold portfolio return (TPR) corresponds to the annual portfolio return which the pension fund requires to keep the funding ratio constant. The analysis of the historical threshold portfolio return, its attribution and its forecasting based on the stochastic liability modeling visualize risk indicators. In our forecasting approach, the future threshold portfolio return over different periods is determined based on the nested stochastic modelling for pension fund membership and their liabilities implemented with different HR policies to quantify their impacts.