Augmenting the Funded Ratio: New Metrics for Liability Based Plans
By Sanjiv Ranjan Das, Daniel N Ostrov, Anand Radhakrishnan, Deep Srivastav & Wylie Tollette
The primary metric used to determine the health of a liability based plan (LBP) is the funded ratio, which is the ratio of the LBP’s current assets to its present-valued liabilities. The funded ratio, however, cannot accommodate a considerable number of important financial factors, so we suggest three additional metrics of financial health, each connected to the probability of fulfilling the plan’s liabilities. The first two metrics compare the current assets and the projected future contributions to those needed to attain either (1) a specified probability for meeting all the liabilities (SAM, the solvency assets multiple) or (2) specified probabilities for meeting each liability (FAM, the funded assets multiple). The third metric, the risk-free funded ratio (RFFR), uses the yield curve for U.S. Treasury STRIPS to determine the fraction of the liabilities that can be covered without risk. We show how these metrics can be computed and used, first using Monte Carlo simulation given a fixed investment portfolio strategy, and then using dynamic programming to determine the optimal investment portfolio strategies that maximize SAM and FAM.
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