Many trustees and sponsoring employers currently face volatile funding ratios (ratio of pension assets to pension liabilities) for their pension plans due to demographic risks and the volatility in financial markets. In addition, new regulation on pension plans and greater scrutiny of the pension plan funding ratios on the company’s balance sheet have highlighted the need to investigate and implement solutions that reduce this volatility. Trustees with plans that have funding ratios of less than 100% (i.e. where the value of liabilities exceed the value of assets) are concerned that their deficit may get worse whereas Trustees with plan with funding ratios in excess of 100% are looking into ways to secure or improve the plan status further.

Management of these risks is complex and the traditional approaches do not address the problem in a practical and integrated way - hence, there is a need to redirect focus to strategies that evaluate return and risk of investment strategies relative to the plan’s liabilities. As a result, we continue to see a growth in plans implementing so-called Liability Driven Investment (LDI) solutions.

At UBS Global Asset Management, we have developed a unique, proprietary capability for defined benefit pension plans called Asset-Liability Investment Solutions (ALIS). ALIS focuses on analyzing investment strategies for pension plans and developing and implementing investment solutions that benchmark against each plan’s custom liability profile.

Why ALIS?

ALIS draws on long standing expertise and state of the art capabilities across UBS Global Asset Management. Traditionally, investment risk has been defined solely in terms of the asset strategy whereas our approach focuses on generating excess returns over the liability and reducing risk commensurate with the plan’s objectives.

We tailor our approach to each client’s unique situation and discuss their time horizon for risk which helps decide customized solutions best for the plan. This is achieved by working together with the client and their consultants.

Our aim is to develop solutions for clients that assume risks that are expected to generate additional returns in an efficient manner (where risk is defined in terms of the funding ratio of the pension plan). We have developed tools that help us to breakdown risk into various components enabling us to identify risks that are expected to be rewarded by returns and risks that are typically non-rewarded. Non-rewarded risks should ideally be removed from the strategy and the rewarded risks are incorporated into the strategy based on the client’s circumstances.

A common misconception is to assume that reduction in current funding plan risk will necessarily reduce future expected returns. The ALIS framework assists plans to reduce the risk of deteriorating funded ratios whilst at the same time ensuring that the plan has a strong possibility of improving the plan’s funding through strong future investment returns. For plans with surpluses, the ALIS framework reduces the possibility of going back to a deficit and provides the possibility of increasing the surplus to target a buy-out.

To request further information, details of key contacts are included in the Advisory team section.