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By Stephen Wiltsher, ASIP, MSc. J.P. Morgan's Investment Analytics and Consulting (IAC) group has developed a robust risk measurement reporting service. This set of tools provides timely and pertinent analytics in an easily digestible format. IAC provides ex-ante market risk reporting services covering decision and exposure analytics including value at risk ("VaR"), stress testing, backtesting and asset liability management analytics. Clients of J.P. Morgan Investor Services have the option to subscribe to the value added reporting services of IAC. As part of the on-boarding service, IAC works with the client to confirm the exact reporting structure, hierarchies, metrics and tests desired, along with the format of deliverables. Audited position data is then seamlessly routed to the IAC risk calculation engine, which is supplied by the award winning risk vendor Algorithmics (an IBM company). Core Risk Service The IAC core risk service output consists of a suite of reports covering VaR and other complimentary metrics such as tail risk and stress tests. This service allows the quantification of positions to be sub-analyzed into individual factor exposures along with their contribution and effect. This data facilitates greater awareness of the current risks within a portfolio which can then be compared to mandate or strategy policies. The service allows clients to determine which methodology to use (Monte Carlo is the most popular but historic simulation and parametric are also available) along with input parameters such as observation period, holding period and level of decay. An associate in the IAC group will advise on the most appropriate configuration of data items and metrics for each client and assist with on-boarding. The core risk service output takes two formats: detailed reports showing multi-layer hierarchy from asset up to portfolio level and one-stop dashboards. The dashboards are thematic and each is based on a specific audience such as Chief Investment Officer, portfolio manager, or plan trustee. Defined Benefit Pension Plan Risk Reporting Service The Defined Benefit Pension Risk Reporting Service is an enhancement to the core risk service, and allows the user to view specialist dashboard reports showing plan assets in terms of their current risk exposures. This can be coupled with analysis of liabilities over a chosen time horizon from both a funding and immunization perspective and can be used to assess risks and exposures at both the local and also group or headquarters level. Therefore, clients are able to analyze total assets, liabilities and funding. In order to undertake such analysis, we require access to liability data either at the plan level or for more detailed reporting segmented into current, deferred and active pensioner. Other data required includes detail of which assets and liabilities have been matched, along with agreement on which rate or curve should be used for discounting (often prespecified as a regulatory requirement). Pension Plan Dashboards The core risk service provides detailed asset level reports. The dashboards are mostly plan and sector level, detailing overall health and status. Each dashboard can be tailored per individual client requirements to show appropriate hierarchy or specific tests. The first example is focused on the health of funding while the second is focused upon the state of assets and liabilities believed to be immunized. Plan Funding & Exposures Dashboard. This report provides a comprehensive overview of a plan's health of funding and compares current plan exposures to plan policy. This is useful as it highlights active risks and potential areas requiring rebalancing or attention. The main sections of this report include:
Exhibit 1: Report excerpt illustrating Fund Status
Exhibit 2: Report excerpt illustrating Liabilities
Plan Immunization Dashboard: The aim of an immunization strategy is to eliminate risk along an entire pension time horizon and thereby increase plan and stakeholder security. To assist in this aim we have developed a dashboard report that provides a comprehensive overview of the health of those assets that have been matched to future liabilities from a risk exposure viewpoint per each time horizon. The main sections of this report include:
Exhibit 3: Report excerpt illustrating Fund Immunization Strategy
Dashboard Summary These two dashboards provide details of the exposures, concentrations and risks of a plan over a given time horizon. The dashboards have been constructed in a template manner, whereby constituent sections are customizable so that the client can specify metrics and tests and receive the dashboard in a format comfortable to that client. For example, the client can specify the VaR methodology and input parameters used, along with the specific stress tests and reporting hierarchy used. Dashboard reports are delivered alongside our core service reports with the same agreed upon reporting frequency. In our view, this type of analysis may soon become a key regulatory requirement. Regulatory Proposals While the measurement of risk is best practice for pension plans in most jurisdictions, the European Insurance and Occupational Pensions Authority (EIOPA), is proposing to increase regulatory requirements for the plans under its jurisdiction. EIOPA is proposing the introduction of funding rules that would treat pension assets and liabilities similar to those of insurance companies. Insurance companies are currently subject to Solvency II regulations whereby liabilities must be discounted at a risk free rate, and where capital requirements are calibrated using VaR. A Solvency II regime for pension plans would have a major effect on plan management, as a risk free rate will be lower than a non risk free rate. Therefore, the net present value of liabilities will be higher and the funding ratio worse. Furthermore in an attempt to immunize plans, it may also be expected that investment will be redirected from higher risk equity and growth type assets towards lower risk fixed income asset classes. Traditionally lower risk brings a lower return, hence the value of future assets will also be lower, a cycle ultimately leading to demands for greater company funding. However one benefit for the asset valuation side is that EIOPA proposes that company promises to pay future contributions can be treated as a credit asset. EIOPA will report back in the summer of 2013 with a finalized set of regulations, and while next summer may appear a long way off, positive analytics positioning can be undertaken now. It can be assumed that for defined benefit pension plans, VaR, SaR and immunization monitoring capabilities will soon achieve a much greater profile. Summary J.P. Morgan's Investment Analytics & Consulting group provides an extensive range of ex-ante risk analytics, including metrics covering asset and liability exposures, risks, sensitivities and funding; metrics which together provide an easily digestible summary of a plans current health. This analysis can assist pension plan executives with identifying and understanding sources of risk and monitoring the plan's adherence to its stated strategy. The service is typically provided on a daily, weekly or monthly basis, depending on clients' requirements. For J.P. Morgan's Accounting Service clients, J.P. Morgan's risk is easy to arrange.
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