NEW YORK -- Xerox Inc.'s pension fund is sticking with PensionMetrics after helping J.P. Morgan Investment Management Inc. test the new risk management system.
The new software program provides tools allowing plan sponsors to measure three- to five-year risk, along with longer- or shorter-term risks.
That's one of the reasons Xerox likes the program. "The two- to three-year time horizon lets us keep track of where intermediate-term risks are," said Mary Cahill, deputy chief investment officer of the fund.
No intermediate studies
Historically, many pension funds have done long-term analysis covering periods of about 10 years using asset-only or asset-liability studies to assist them in making asset mix recommendations, said Michael Granito, managing director and head of the PensionMetrics project in New York.
Some pension funds also have done short-term, month-to-month analysis to measure monitoring or compliance problems.
The Stamford, Conn.-based Xerox fund had conducted 10- and 20-year asset-liability studies in the past, said Ms. Cahill, but not the intermediate-term study the PensionMetrics program allows.
Mr. Granito said: "Plan sponsors need the technology and need to do the risk management process internally. The design of PensionMetrics will fill those needs."
Six pension funds, which Mr. Granito declined to name, are now using the PensionMetrics system.
PensionMetrics, was developed with help from the RiskMetrics Group, a subsidiary of J.P. Morgan that was spun off a couple of years ago.
With the software installed in staff computers, Ms. Cahill said, "we can easily run what-if analyses ourselves."
"It's a flexible system and it has a reporting format that helps in explaining the analysis" when preparing reports for the company's treasurer, she added.
Xerox became part of the testing program because it was looking to update its system, Ms. Cahill said. Being part of the program "gave us an opportunity to have input into how this tool was being developed," she said.
PensionMetrics' analytics menu allows plan sponsors to assess the nature and magnitude of their financial risks, said Mr. Granito.
"Risks can be evaluated using value-at-risk measures developed from either a long-term or short-term historical perspective. Alternatively, users can focus on historical simulation of the current portfolio to examine the distributional properties that may not always be captured by VAR," he added.
Complex structure
The Xerox pension plan "has a complex benefit structure, including a cash balance, defined benefit and defined contribution plan," said Ms. Cahill. "This particular system is built so it can accept complex liability structures."
Plan sponsors can look at purely statistical measures or explicit return scenarios, said Mr. Granito. "The current portfolio can 're-live' a desired historical period. For example, what if we now re-experienced returns of the third quarter of 1978. Alternatively, the plan sponsor may input desired market scenarios."
As one example, Ms. Cahill said, the system has helped determine how much money to allocate to international investments. It allows the fund to look at its managers' tracking errors vs. the Morgan Stanley Capital International Europe Australasia Far East index and look at the correlation of its international managers vs. its domestic managers.
Existing valuations
PensionMetrics software is also designed to work with pension plans' existing actuarial valuations. It extracts key data and relationships from the plans' periodic valuations.
"This enables us to treat complex benefit formulas such as those resulting from defined benefit (plans) converting to cash balance plans where transition provisions give the liability option characteristics," Mr. Granito said.
PensionMetrics also uses Financial Accounting Standards Board accounting and ERISA/IRS funding rules to develop risk measures for pension expense and contributions.
"These quantities are functions of assets, liabilities, interest rates and other variables that are evaluated using the array of risk analytics that PensionMetrics provides -- and consequently, a full range of risk measures for expense and contribution are available," said Mr. Granito.
