Model Review and Validation

Probe the Model

Pensions risk models can be complex and opaque. In this theoretical and numerical analysis of the strengths and weaknesses of a pensions risk model, clients receive a detailed scan that identifies any surprises or oversights lurking in their risk modelling.

  • If the model is used to make decisions, its failings could lead to bad decisions
  • Vast sums can be lost as a result of events that banks’ models said should never happen.
  • Changes in allocation, hedging decisions or market shifts can affect the appropriateness of a model.
  • The regulatory landscape is changing
  • New regulation like Basel III, Solvency II and EMIR change the game.
  • Model risk management is a hot topic, with the US Federal Reserve recently issuing guidelines on method.
  • Knowing the limits of a model means it can be used appropriately.
  • Avoid missing out on investment opportunities, demanding excessive contributions or taking on excessive risk that could impact funding ratio.

 

The Value

The Model is analysed to check that it

  • Complies with relevant legislation and requirements
  • Helps the governance team engage with the regulator
  • Aids in engagement with trustees on the topic of consideration of investment strategies that are more efficient with respect to capital requirements

The Model Review Report gives

  • An objective, third party review of the strengths and weaknesses of the model
  • A review of the conceptual soundness of the model’s assumptions and methodology
  • A review of the validity of key numerical outputs
  • Judgement about where the model is likely to be less reliable
  • Ongoing monitoring of the model’s validity

Download the Model Review Summary on the right of this page. 

 

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Related Reading


BLOG Challenges of Long-Term Risk Models Part I

BLOG Challenges of Long-Term Risk Models Part II