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A multi-stage stochastic programming for asset - liability management in Civil Servants Pension Fund

Document Type : Original Research Paper

Authors

Department of Accounting, Economics and Accounting Faculty, Islamic Azad University, South Tehran Branch, Tehran, Iran

Abstract

BACKGROUND AND OBJECTIVES: Based on financial statements of 2013 to 2021 for Civil Servants Pension Fund, fiscal sustainability index (ratio of resources to expenditures) was 40% in average while this index should be equal or more than 100% so that the Fund would be able to fulfill its liabilities; Due to lack of financial ability, about 90% of the credits needed to pay pension salaries were provided by the government aid. In this paper, analyzing of asset - liability management of Civil Servants Pension Fund is carried out using a model based on multi-stage stochastic programming and suggestions for managing the assets and liabilities of the Fund with the aim of fiscal sustainability and gradually reducing dependence on government aid to fulfill annual liabilities have been presented.
METHODS: Autoregressive Moving-Average Model was used for predicting interest rate of different asset classes in next 20 years (2022 to 2041) and for modeling Asset - Liability Management for the Fund, multi-stage stochastic programming was applied based on predicted data for next 20 years and generating 300 scenarios with a 95% confidence interval, and the results have been analyzed. The model was implemented in GAMS software and results of the model were evaluated with application of conditional value at risk index. Data used for the study are based on financial statements of 2007 to 2021 for Civil Servants Pension Fund.
FINDINGS: The implementation of the multi-stage stochastic programming model during years of 2011 to 2021 has shown a rational behavior based on compliance with investment policies and defined limits and an acceptable allocation of the fund's capital resources to all types of asset classes. Implementation of the model during years of 2022 to 2041, taking into account the investment and management policies of the Fund (case study) and restrictions (including a ceiling of 65% for stocks, a ceiling of 15% for real estate, a minimum share of 19% for bonds and bank deposits and a minimum share of five percent for cash of the total assets of the fund) was able to achieve a feasible solution in all scenarios, and the yearly value at risk of the portfolio with a probability of 5% was averagely about 2.3% of total value of the portfolio.
CONCLUSION: Results of the model and comparison with results of traditional method used for asset - liability management of the case study showed that if the proposed model is used for a period of 20 years in the future, the value of the Fund's assets will grow more than the value resulted from traditional method and the need for receiving government aid to fulfill Fund obligations will be reduced.

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References
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Iranian Journal of Insurance Research
Volume 12, Issue 3 - Serial Number 45
May 2023
Pages 165-180
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History
  • Receive Date: 20 April 2023
  • Revise Date: 21 May 2023
  • Accept Date: 04 June 2023
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