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The Actuary The magazine of the Institute & Faculty of Actuaries

Imperial alumni present research findings

The evening showcased selected research projects by Imperial College Business School Actuarial Finance alumni. Chaired by Trevor Watkins, director of education, presenters included:

Joe Moore (Aon Hewitt): ‘Optimal Global Asset Allocation for Pension Funds under Regime Switching’. The global financial crisis and subsequent global recession demonstrated increasing correlations between international asset classes and increasing volatilities and lower returns within asset classes in a bear market. 
This is inconsistent with diversification benefits often attributed to international investment, since these benefits appear to reduce when investors rely on them most.

Moore’s research extends previous analyses of the benefits of international diversification and the cost of ignoring regimes in light of recent financial developments. Using a new proprietary Regime Switching model and setting the analysis in the context of optimal portfolio allocation for pension funds, he presented evidence disagreeing with previous conclusions that the costs of ignoring the presence of regimes are small.

Ruth Ward (Bluefin Group): ‘Impact of defined benefit pensions on corporate bond spreads’.Ward’s research assessed the impact of defined benefit pension information disclosed in corporate accounts on the credit spreads of individual firms. 
She analysed data on almost 5,000 investment-grade and over 1,600 
high-yield US corporate bonds over the period 31 December 2001-2007.

Ward found that unfunded pension liabilities increased credit spreads, particularly among high-yield bonds, but that the effect is asymmetric with pension deficits increasing credit spreads more than pension surpluses reduced them. She found that the market perceives additional risk in defined benefit pensions, with even funded pension liabilities being priced into credit spreads, and that sensitivity to unfunded pension liabilities is over twice that to ordinary long-term firm debt.

Muhammad Ayaz Abid (Abid Actuarial Consulting): ‘Assessment of defined benefit obligation risk for FTSE 100 companies under the risk based Solvency II framework’. The purpose of Abid’s research was two-fold — to provide a framework for modelling the capital necessary to support the defined benefit pension obligation risk for FTSE 100 companies under the 
Solvency II framework, and to discuss the issues surrounding applying the Solvency II type standard to pensions.

Abid found that the application of a 
risk-based adequacy Solvency II framework to pension funds would help remove regulatory arbitrage and promote a level playing field for pensions in Europe. He proposed a modified Solvency II framework for pension funds, incorporating the good features of a risk-based capital adequacy framework.

For more information on the Actuarial Finance programme and the research projects, see www.imperial.ac.uk/business-school/programmes/msc-actuarial-finance. 

Report by Tony Hewitt, director of the 
Actuarial Finance MSc, a tailored programme for actuarial trainees in full-time employment