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Key Findings Details

Technical Review Panel for the Pension Insurance Modeling System (PIMS)
by Olivia S. Mitchell, Christopher C. Geczy, Robert Novy-Marx, Raimond H. Maurer, Donald E. Fuerst, Christopher M. Bone, Donald J. Segal, Martin G. Clarke, Frank J. Fabozzi, Deborah Lucas and David F. Babbel
WP 2013-290

The Panel’s key findings may be summarized as follows:

(1) The PIMS models are an important and valuable tool in modeling the Agency’s liability risk. To the best of our knowledge, there is no other model that can do a comparable job.

(2) Nevertheless, some improvements could be integrated in the Agency’s approach to modeling. Those deserving highest priority attention in the experts’ view are the following:

(a) Incorporating systematic mortality risk (i.e., treat mortality and longevity as stochastic variables);
(b) Including new asset classes increasingly found in defined benefit plan portfolios (e.g., commercial real estate, private equity funds, infrastructure, hedge funds, and others);
(c) Developing a more complex model for the term structure of interest rates; and
(d) Incorporating an option value approach to pricing the insurance provided.

(3) The Agency could also do more to communicate the range of uncertainty and potential for problems associated with the PBGC’s financial status. This could include additional information including the Conditional Value at Risk, and perhaps an ‘intermediate,’ ‘optimistic,’ and ‘pessimistic’ set of projected outcomes, as well as the expected ‘date of exhaustion’ for assets backing pension benefits insured by the PBGC.