Kerry Mack, Manager, Pension Administration Answers 1818 Society’s Questions on Staff Retirement Plan

Society: In the recent few months the financial markets have experienced a rapid decline in values. Under these conditions, how safe are our pension payments under the Staff Retirement Plan?

Kerry: Your concern is well taken and I want to assure you that my colleagues who are overseeing the SRP investments are watching the current economic situation very closely and taking the steps we believe are appropriate to ensure the continued health of the pension plan.

I would like to underline the fact that the Staff Retirement Plan is a defined benefit plan with a very strong sponsor in the World Bank group. Thus, your pension benefits are guaranteed not just by the assets of the Plan, but also by the World Bank itself, which is obligated to increase its contributions in order to meet the required pension benefit payments should the Plan assets not be sufficient to do so.

Society:To what extent the reported valuation of assets in the Pension Fund is credible and realistic?

Kerry: A large share of the Plan assets is invested in liquid, publicly traded securities, and those values are readily available from objective, independent sources. Part of the portfolio, however, is invested in so called “alternative asset classes” which are less liquid and, therefore, current values are not as readily available for them. The method of reporting asset values for our alternative asset class portfolio has been based on audited values received from our underlying fund managers and performing ongoing monitoring to determine if the NAV reported is an appropriate determination of fair value. The determination of fair value for our alternative asset class involves scrutinizing each and every audited financial statement of the underlying funds to ensure that:

  • Funds received a clean audit opinion from a reputable audit firm
  • Each fund is compliant with the accounting principles generally accepted in the United States of America (US GAAP) or the International Financial Reporting Standards (IFRS)
  • Any significant change in the valuation methodology and any subsequent event that might affect fund valuation, has been incorporated by the fundmanager

In the more illiquid fixed income securities, we perform extensive tests by obtaining numerous price sources and collaborate with market experts in determining the fair values of these securities.

The valuation of illiquid assets is inherently difficult and judgments are often involved. However, every effort is being made by the Plan's management to ensure that the valuations of alternative assets are reasonable and reflect current market conditions.

Society:So, are assets in the Pension Fund adequate enough to make pension payments?

Kerry: When looking at the ability to make pension payments, it is important to not focus only on the asset side of the balance sheet. What is the most important is not the value of the assets alone, but the relationship of the assets to the liabilities (the funded ratio). Even though the value of the assets has gone down, the Plan remains quite well funded compared to many other endowments and pension plans, even taking into consideration that the SRP obligations are indexed for inflation, which is not the case for many other plans. In this regard, our recent changes in Strategic Asset Allocation move us toward a Liability Driven Investment approach that helps to stabilize the funded ratio, all other things being equal. Part of the assets of the portfolio is invested in instruments that will hedge changes in the value of the liabilities. The diversification into other asset classes also offers protection to the Plan by increasing the share of the portfolio not as closely correlated with the equity markets. While we will be transitioning to this new SAAover time, the increased diversification we have already accomplished resulted in a smaller decrease in the value of the portfolio than if we had been invested in equities and fixed income instruments alone, as is the case in many other pension plans

I would also like to emphasize that the Plan obligations are long-term liabilities. Thus, our Strategic Asset Allocation is intended to provide optimal return over a 10 or more year period, not to react to short-term market movements. Our asset allocation was arrived at after much discussion with the Pension Finance Committee and included analysis of expected performance under various market conditions, including some extreme conditions, in order to arrive at an allocation that we believe will put the Plan in the best position to face the unavoidable market cycles. Financial markets are notoriously difficult to time and if we moved large portions of the portfolio to cash or other instruments designed primarily to protect principal, we would risk missing the upturn in the market when it comes and would also detract from the Plan's ability to meet the obligations since such assets do not generate sufficient return to keep pace with inflation. No SAA is designed to show positive results in a market environment like this one, which everyone describes as unprecedented. However, as the economy comes out of the negative part of the cycle and comes back to more normal environments, our portfolio is well positioned to produce balanced results over the long term.