Chosen theme: How to Evaluate Pension Plan Performance. We break down what truly drives success, from funded status and risk-adjusted returns to governance discipline and stakeholder trust—so you can judge results with clarity and confidence.
Clarify Purpose and Promises
Start with the promise you must keep: timely, reliable benefits. Align performance evaluation with that mission, not headline returns alone. Invite stakeholders to agree on objectives and constraints, then subscribe to updates as your framework evolves.
Select Appropriate Time Horizons
Pension obligations play out over decades. Evaluate quarterly data for signals, but emphasize rolling three-, five-, and ten-year windows. Longer horizons reveal persistence, manager skill, and policy discipline that short-term noise can easily obscure.
Metrics and Benchmarks That Actually Matter
Judge managers and the total fund against a policy benchmark reflecting your strategic allocation. This isolates value from active decisions. If results lag consistently, question assumptions, implementation, or costs—and comment with your benchmarking challenges.
Metrics and Benchmarks That Actually Matter
Track funded ratio, required contributions, and benefit security together. Strong returns mean little if liabilities outpace assets. Monitor actuarial assumptions, especially discount rates and mortality, which can meaningfully shift your funded status narrative overnight.
Asset–Liability Management: Evaluating What Truly Drives Outcomes
Liability Sensitivity and Discount Rates
Assess duration and convexity of liabilities, then compare them to your asset interest-rate exposure. Small changes in discount rates can move liabilities meaningfully. Evaluate how your strategy behaves under shifting curves and credit spreads.
Hedging Interest-Rate Risk Strategically
Review hedge ratios and their effectiveness through different rate regimes. Long-duration bonds, swaps, and futures can reduce surplus volatility. Document governance thresholds for adjusting hedges and ask readers how they calibrate interest-rate coverage.
Measuring Surplus Volatility
Evaluate volatility of assets minus liabilities, not assets alone. Surplus stability better reflects progress toward fully funded status. Regularly stress test surplus under rate shocks, equity selloffs, and credit spread widening to avoid complacency.
Total Costs: Explicit and Hidden
Calculate total expense ratios, performance fees, and look-through manager costs. Don’t ignore trading costs, market impact, and custody fees. Even small, persistent drags compound meaningfully over decades and can jeopardize funded status.
Net-of-Fee Value Added
Examine whether active strategies justify their fees after risk and implementation frictions. Attribute value by allocation, selection, and timing. If net alpha is unreliable, consider simpler, cheaper exposures and tell us where you’ve found durable efficiencies.
Governance, Attribution, and Decision Quality
Investment Policy and Accountability
Ensure the investment policy statement is current, measurable, and followed. Map decisions to objectives, assign responsibility, and document rationales. Regularly review whether incentives and reporting align with long-term benefit security.
Performance Attribution That Tells a Story
Decompose returns into allocation, selection, and interaction effects. Link each effect to decisions and market context. Good attribution reads like a clear narrative, helping trustees learn, adapt, and avoid repeating avoidable mistakes.
Risk, Liquidity, and Stress Testing
Test portfolios against historical shocks and bespoke scenarios: inflation spikes, rate resets, credit crunches, and rapid recoveries. Use these insights to validate your strategy or refine hedges before the next surprise arrives.
Risk, Liquidity, and Stress Testing
A plan that cannot meet monthly benefits or margin calls fails its core mission. Map cash flows, collateral needs, and redemption terms. Establish buffers and pre-approved actions for stressed liquidity events.
Peer Context, Reporting, and Stakeholder Trust
Peer rankings can illuminate or mislead. Adjust for plan size, liquidity needs, and liability profile. Focus on structural differences before drawing conclusions, and share how you contextualize peer comparisons in trustee meetings.
Peer Context, Reporting, and Stakeholder Trust
Build concise dashboards highlighting funded status, surplus volatility, risk-adjusted returns, and costs. Avoid jargon and burying bad news. Clear reporting invites better questions and decisions—subscribe to get our evolving dashboard templates.
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