Pension fund asset allocation in a low interest rate environment - - PowerPoint PPT Presentation

Pension fund asset allocation in a low interest rate environment

Saurabh Rastogi

February 11, 2016

Overview: CIBC’s Global Pension Plan Structure

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Overview: CIBC Pension Plan

• The bank’s principal plan is the CIBC Pension Plan which accounts for around 90% of the bank’s total

pension plan assets and liabilities

• The CIBC Pension Plan is a Defined Benefit (DB) plan so the bank bears all investment risk

associated with fulfilling the pension promise to members

• To secure the pension promise the plan is funded and as at October 31, 2015 the plan showed a surplus
• f approx. $300MM (see CIBC financial disclosures)
• The assets of the plan are invested across a diversified portfolio comprising of equity and debt

securities in both public an private markets

• The October 31, 2015 asset allocation versus the long term strategic target allocation is shown below:

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Pension Accounting

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• Since 2013 the quarterly change in the marked-to-market (MTM) value of the bank’s pension plans has

been reflected on the balance sheet

• Changes in the MTM position of the plan are recognized through Other Comprehensive Income (OCI)
• OCI is a component of the bank’s Tier 1 capital and MTM volatility from the pension plans is therefore

a source of Tier 1 Capital volatility to the bank Pension

Mark to Market

$

Bank

Balance Sheet

Assets Liabilities Equity

Accounting rules

Tier 1 Capital Asymmetry

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• Basel III does not permit the inclusion of pension plan surplus in Tier 1 Capital
• Consequently any pension plan surplus is removed from Tier 1 Capital creating an asymmetric risk to

the bank

• When the pension plans are in surplus, the impact of losses to Tier 1 Capital are non-existent as

losses are offset by a reduction in surplus deduction

• When the plans are in a deficit, however, the impacts can be potentially large
• No other portfolio in our bank exhibits this asymmetry or has natural characteristics that can replicate
• r naturally offset this asymmetry

Low Returns are Baked In…

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Source: Bloomberg

Low Returns are Baked In…

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• Projected returns are lowest outside the late 90s TMT bubble.

40% Bonds 60% Stocks 70% Bonds 30% Stocks

Source: http://www.hussmanfunds.com/rsi/policyportfolio.htm

Implications of Low Expected Returns

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• Rising capital volatility from the pension plan
• Low expected return levels would lead to quarters where we have negative impacts on capital
• Understanding of liability cash flow profiles become extremely important
• What is liquidity worth to us?
• Management of the plan needs to change
• Enhancing our tool kit
• Constant review of exposures
• Increased frequency of A-L studies
• Developing a holistic approach

What returns do we need?

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• The traditional approach to modeling liabilities takes into account accrued benefits only
• As accrued benefits are ‘fixed’ in the future, the value of assets required today to honour these benefits depends on the

asset return received in the future

• If the expected asset return is insufficient to cover the benefits, contributions must be made to cover the difference
• As expected return on assets fall, contributions therefore increase (or vice-a-versa contributions paid reduce the required

return on assets)

x.xx% p.a. Required Return

• Meets accrued cash flows
• Annual contributions of 1% assets

x.xx% p.a. Required Return

• Meets accrued cash flows
• No future contributions

Accrued Benefits Accrued Benefits

Principles and Tools

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• Shareholder and Fiduciary perspectives to be kept in balance
• Holistic Framework for managing capital volatility
• Risk budget framework for allocating to sources of capital volatility risk
• Surplus-at-Risk framework
• More active oversight under appropriate governance and pre-defined risk appetite
• Leveraging all available tools and asset classes
• Determining the value of liquidity and the implicit put option

Paper Discussion & Review

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• Countercyclical rebalancing behavior and our experience
• Focus on asset returns
• Rebalancing policy
• Pre and Post IAS19R
• Heightened attention to market moves
• Focus on asset returns but shift to liabilities
• Strategic Asset Allocation
• What is it and how should we think about it?
• Which perspective? Shareholder, Fiduciary or both?
• What are the synergies that we need to consider