Asset & Liability Management
Dutch ALM expertise and ALM models are unparalleled in terms of breadth and depth in the international market.
The Netherlands has the longest ALM history and best reputation in Europe, resulting from the fact that the Netherlands is a relatively advanced nation is pension terms, and that the Dutch experts have been active for 25 years in building ALM expertise and models. In addition, the Dutch pension sector has demonstrated over many years a structural willingness to invest heavily in ALM.
Dutch ALM expertise and ALM models are unparalleled in terms of breadth and depth in the international market. The full range of pan-European pension funds, from specific derivatives to the analysis of pension reform measures, does not present any difficulty for the Dutch ALM sector, demonstrated by the fact that Dutch ALM expertise is already extensively applied outside the Netherlands.
Asset and Liability Management explained
Asset and Liability Management (ALM) concerns the independent support of pension managers in determining and managing balanced and efficient pension deals. The pension deal is given shape by means of an integrated pension, contribution and investment policy, for which the determination of investment strategy is crucial. On the one hand, if a one per cent additional return on the pension investments is realised, this will make the pension system 30 per cent cheaper. On the other hand, financial markets are increasingly efficient and, as a result, additional return is inevitably coupled with additional risk. This investment risk must be deliberately counterbalanced by the pension risk that participants and sponsors are willing to accept, and by allowing restricted and temporary under-coverage. Partly due to the ageing population, it becomes ever more difficult in practice to offset these risks. Participants increasingly desire security, and organisations have become averse to pension risk particularly due to international accounting rules. Furthermore, the pension regulations themselves have been tightened up.
Asset and Liability Management (ALM) concerns the independent support of pension managers in determining and managing balanced and efficient pension deals. The pension deal is given shape by means of an integrated pension, contribution and investment policy, for which the determination of investment strategy is crucial. On the one hand, if a one per cent additional return on the pension investments is realised, this will make the pension system 30 per cent cheaper. On the other hand, financial markets are increasingly efficient and, as a result, additional return is inevitably coupled with additional risk. This investment risk must be deliberately counterbalanced by the pension risk that participants and sponsors are willing to accept, and by allowing restricted and temporary under-coverage. Partly due to the ageing population, it becomes ever more difficult in practice to offset these risks. Participants increasingly desire security, and organisations have become averse to pension risk particularly due to international accounting rules. Furthermore, the pension regulations themselves have been tightened up.
Therefore it becomes more difficult for pension managers to determine and manage pension deals and corresponding investment policies. ALM experts, equipped with ALM models and technology, can support pension managers in this area.
ALM models can support pension managers and their stakeholders in two ways:
1. Measurement is knowledge
ALM models aim to illustrate the structure and uncertainty of the economic world by means of macro-economic scenarios, with the quality of the scenario being decisive in estimating how the pension deal will turn out for each of the stakeholders. This applies first of all to the management of the fund, which has to be informed of their expected situation and risks. For organisations it means that expectations and risks are clearly defined; these must be accounted for in the balance sheets and profit and loss accounts to be in line with international accounting rules. ALM models offer the functionality to execute this consistently, for all the country funds in which the organisations are represented.
ALM models aim to illustrate the structure and uncertainty of the economic world by means of macro-economic scenarios, with the quality of the scenario being decisive in estimating how the pension deal will turn out for each of the stakeholders. This applies first of all to the management of the fund, which has to be informed of their expected situation and risks. For organisations it means that expectations and risks are clearly defined; these must be accounted for in the balance sheets and profit and loss accounts to be in line with international accounting rules. ALM models offer the functionality to execute this consistently, for all the country funds in which the organisations are represented.
2. Efficiency improvements
The second dimension concerns the identification of efficiency gains in the pension deal – for example, by means of measurements on the pension side – and by adaptations and improvements to investment policy.
The second dimension concerns the identification of efficiency gains in the pension deal – for example, by means of measurements on the pension side – and by adaptations and improvements to investment policy.
The investment policy is becoming increasingly important, to prevent further economising on the pension side. In this context much emphasis is placed on “alternatives”, such as private equity and infrastructure, that often provide additional long-term efficiency improvements for investors. Much attention is also paid to protection from inflation, by either investing in categories that cover the inflation in the long term, such as immovable property, or derivatives such as inflation swaps. Fund managers can either do this themselves or with the help of a fiduciary manager.
If the pension deal is still not practicable through intelligent investment policy, pension-side measures can be applied. These include conditional indexation, collective DC schemes and reinsurance. Dutch ALM experts and ALM models are also perfectly placed to offer optimal support to the decision-making process in this area.
Relation between ALM and Fiduciary Management
In the interest of the end customer, the independent ALM advisors and qualified Fiduciary Managers co-operate closely in the Netherlands. Highly qualified Fiduciary Managers also have the required ALM expertise.
In the interest of the end customer, the independent ALM advisors and qualified Fiduciary Managers co-operate closely in the Netherlands. Highly qualified Fiduciary Managers also have the required ALM expertise.