Pensionpoly

Brainteaser...... What skills do you need to manage a pension fund?

Whatever brilliant your answer, I'm sure that the 'art of playing Monopoly' wasn't a part of it.

Yet, playing Monopoly and managing a pension fund  [ let's call it Pensionpoly] have a lot in common nowadays.

The main difference is that with Monopoly you can actually calculate the probability you land on one of the forty squares, while in Pensionpoly you THINK you can calculate the probability of the return of a certain asset class.

The similarities between Monopoly and Pensionpoly are that while executing a certain buying strategy (whether houses, hotels, stocks, bonds  or other asset classes), the  - short term - outcome also depends on the (financial) effects of the squares we land on and on a number of uncertain events as a result of drawing  Chance and Community Chest cards.

Monopoly probabilities
As described by Jörg Bewersdorff, the probability of landing on a particular square, basically can be calculated either on basis of Markov Chains or by means of applying the famous Monte Carlo method.

As an example here's the outcome of lending on a particular square on basis of a Monte Carlo simulation (more than 60.000 observations).

What's striking is that there's a 9.3% chance of ending up in jail.....

Of course, playing Monopoly takes a lot more than just calculating the probability on which square you'll be landing. Some excellent calculations have been made by Truman Collins (2005) , that include:

• Long term probabilities for ending up on each of the squares
• Expected income per opponent roll on all properties and other squares
• Expected number of opponent rolls to lose or recoup mortgages

Pensionpoly
Back to Pensionpoly.... 
You can now practice you skills in playing Pensionpoly by downloading the Pensionpoly board game here.

Unzip (no viruses) the download (2Mb) file, click on 'Monopoly.exe' and start playing Pensionpoly in a minute.

Playing Pensionpoly is like playing Monopoly, with the following main differences:

1. Cities are replaced by Asset Classes  
2. Streets are investment categories in a certain Asset Class
3. 'Buying Houses' is replaced by hiring (buying, appointing) Fund Managers (F-Managers); 
4. Five Fund managers make no Hotel, but a Fund Team (F-Team)
5. Chance cards are replaced by Asset (chance) cards
6. Community Chest cards are replaced by Liability (chance) cards

Pensionpoly is a nice example of what is called Gamification. More info about  this subject on Pension Gamification.....

Have fun playing Pensionpoly and don't forget to play normal Monopoly with this application as well !


Sources and related links
- Bewersdorff: Monopoly in the view of mathematics (2002)
- German: Monopoly im Blickwinkel der Mathematik
- Collins: Probabilities in the Game of Monopoly (2005)

- Create your own Monopoly at Parkeeerbonnen (Dutch)
- Direct download Monopoly from Parkeerbonnen
- Markov Chains and Monopoly (Scribd)

- 18-karat solid gold Monopoly set (Museum of American Finance)

Download
- - Download Pensionpoly (zip file)

Risky and Happy 2012

A happy new year to all Actuary-Info readers!



While actuaries and other risk mangers are still trying to cope with 'real' (btw: what's really real?) risks, a lot of other people are still worried about the risk of risks:

The end of the world

as (assumed) predicted by the Mayans!

Maya Calendar Explained

Consult Cathryn Reese-Taylor (program director, department Archeology University of Calgary) (or read this link) for who's interested in the interesting explanation behind the end of the Maya calender.

In short, it turns out that 21 December 2012 is simply the end of the 13th baktun, a period of roughly 5200 years that the Maya used as a period-unit for counting time. Just like we in our culture use millennial periods for constructing time.

Besides this fact, the Maya predicted other events far into the future, well beyond 2012. Problem solved!

2012: year of Risks
Having said all of this, it doesn't imply that 2012 will not turn out to become a year of risks: (aamof) It Will!

New Risk Management

Main issue will be that we'll have to change our view on Risk Management in 2012 from a classical view to a new self-conscious view ...

The old classical view goes something like this:

In the old view, Regulation and Governance are more or less considered as 'constant' and as a 'condition you have to meet'.

However,  nothing is farther from the truth.
In the last decade we've seen that changes in Regulation substantially have influenced the way we calculated, perceived and managed risk. The obvious examples are everywhere around us: Solvency II, Basel I/II/III, AIFMD, MIFID, OTC, etc., etc.........

So, in fact the new simplified Risk Management looks (less spectacular) more like this:

In this 'New'  Risk Model, EVERYTHING -including Risk management itself, is considered as RISK!

Main issue is not to take anything (or risk) for granted and to (re)consider each risk element (minimal) once a year in order to keep RISK FIT.

Just a few illustrations on some of the new risk topics to set the mind in the right direction:

I. Regulation Risk
It's not just a case of checking if you're Regulation Risk Compliant. It's also anticipating on coming new legislation, directives and rules. Not only 'formal' new directives (like Solvency) but also informal rules like CSR's  "acting green" are important. Not acting pro-active could cause a severe reputation risk.

II. Governance Risk
It's not only about improving (corporate) governance quality and reducing the risk of governance failures, it's more. Managing the risk of governance risk, is double and independent checking on:
- Truly independence of (supervisory) board members
- Timely (3 years) rotation
- Appointing timely 'new' knowledge in boards, audit/investment committees
- Transparent reporting to shareholders and regulators about (different) views
   and explaining WHY decisions have been taken the way they are, including
   pro and contra arguments.

III. 'Risk Appetite' Risk
- Check (by reporting!) regularly if your risk budget and risk results
   (SD, Sharpe Ratio, Sortino Ratio, Information ratio, etc) are still in
   line with your risk appetite. If not: Act upon it!
- Compare your risk appetite and the results with those of compettitors.


IV. Models and Data Risk
Change and adapt your data and used models regularly with reality.
You do? ......
E.g.: Risk is not just Standard Deviation (SD). If so, why are Efficient frontiers in ALM still calculated and published on basis of simple (but not applicable anymore!) SD.


Anyhow.... Risky and Happy 2012 Risks!

Related Links:
- Definitions: SD, Sharpe Ratio, Sortino Ratio, Information ratio, etc
- PWC European financial regulation updates
- EIFR
- Bloomberg Financial regulation
- ICFR: What does good regulation look like?

Sylvester: ABP, Cut Pensions?

At the end of 2011, let's take a short view on the madness around cutting pensions.

As a leading example, I'll discuss ABP, a Dutch 240 billion pension fund and one of the largest pension funds in the world.

Being fanatic blog readers and actuaries, you're probably 'in' for a teasing joke on Sylvester or 'New Years Eve'.

As you all know communication is key in the pension business. However, as pension investment results get more volatile and complex (in  time) to explain, communication about pension issues becomes more and more Chinese for ordinary pension members.

The latest threat, cutting pension benefits, urges board members to develop themselves to a kind of  'five-legged sheep' ....  The new 'normal' pension board member is undoubtedly the ideal combination of an actuary, accountant, investment specialist, communication expert, ICT specialist and - on top of - a keen psychologist.

Communication is a Profession
I'll give a short slightly exaggerated demonstration to all pension board members and actuaries of how difficult reading and understanding a well meant pension board message is, to an average pension member.

In order to 'save what can be saved' ABP's Vice-Chair Joop van Lunteren pleads for political help in ABP's 2011 Q3 Press Release.
Besides the question if a press release is indeed the right place for such a call, most pension members will have a hard time to understand what Mr. Van Lunteren wants so rightfully to express. For these pension members Mr. van Lunteren's message is more like Chinese...

ABP's Q3 Results: Cutting Pensions?
Now to more serious business...  Altough ABP's Q3 results are indeed not splendid,

the call for a more long term sustainable valuation system that makes pension funds less dependent upon volatile interest rates makes sense!

Also, there no need for panic (direct cutting measures), as from the 2010 annual report we can find that the annual benefits payments summed up to around € 7.5 billion on a total of assets of around € 240 Billion. If ABP would be allowed to wait for the effects of taken measures en developing markets for another five years, a 10% cutting of benefits would only have an impact of around € 4 to 6 billion on the total assets of around € 240 mln.
More info about Cutting Pension rights on Actuary Info....

Happy Silvester and good luck ABP!


Sources/Links:
- ABP Q3 Press Release
- ABP Annual Report 2010 
- Ming Imperial Fonts