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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

Meera, an actuary at an Indian pension fund consultancy, finds that a trustee client wants to invest heavily in a high-return unlisted infrastructure vehicle that is illiquid. Benefit payments are due monthly and the fund has little cash. Which advice best reflects a key ALM challenge?

The actuary should advise that liquidity needs for benefit payments be assessed alongside expected return, and limit the illiquid allocation. Monthly outgo with little cash means forced sales are possible, so high expected return alone does not justify the investment.

  1. AIlliquid assets are acceptable provided the expected return exceeds the discount rate
  2. BLiquidity needs to meet benefit outgo must be assessed alongside return, so the allocation should be limitedCorrect
  3. CLiquidity is irrelevant for pension funds because liabilities are long term
  4. DThe allocation should be maximised because higher returns reduce contributions
  5. The decision belongs solely to trustees, so the actuary should not comment

Explanation

ALM requires matching not only the amount and term but also the liquidity of assets to cashflow needs. With monthly outgo and little cash, a large illiquid holding risks forced sales. Actuaries should advise on this even when trustees decide.

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