NEPC is one of the industry’s largest independent, full-service investment consulting firms, serving 347 clients with total assets over US$920 billion (as of 6/30/2016). The firm has thought-leadership and innovation at its core, and was one of the very first industry adopters of LDI solutions.
In line with its leading approach, NEPC adopted PFaroe in 2015, embracing its use for defined benefit (DB) pension plan clients that have a heightened focus on asset-liability risk management. PFaroe complements NEPC’s offering by enhancing the firm’s daily monitoring capabilities and allowing for more effective implementation of customized asset allocation glide path strategies.
Brian Roberts, Senior Consultant at NEPC, comments: “We recognized that having a cohesive and comprehensive suite of analytics that is user-friendly and intuitive would provide our clients with a better experience and service. With PFaroe we can monitor daily funded status, conduct Value at Risk analysis, evaluate Key Rate Duration positioning and incorporate stochastic analysis within asset liability studies. When considering how best to provide this to our clients, PFaroe stood out as the most innovative, and respected, offering on the market. Not only has the platform driven forward the quality of our service, it has also increased internal efficiency, offering potential from a new business perspective.”
He adds: “Customization is a core part of the NEPC spirit, and at the consultant and analyst level we encourage team members to offer tailored solutions to clients while accounting for their individual needs, situations and strategies. Given this is ingrained in us culturally, it was essential to identify an analytics and reporting tool which was flexible enough to allow for our customized solutions. PFaroe has met our needs – and the RiskFirst team has been extremely proactive in meeting our requests to enhance and evolve the system.”
NEPC’s usage centres on daily monitoring and asset-liability management (ALM) for DB plans. The benefits of PFaroe in this respect can be summed up in three words: accuracy, speed and efficiency.
1. Daily monitoring of funded status
Based on NEPC’s latest Defined Benefit Trends Survey, over 60% of respondents currently utilize some form of LDI. Of NEPC’s clients, over 70% have incorporated either LDI or a glide path approach as part of their investment strategy. As such, PFaroe’s ability to monitor clients’ funding positions on a daily basis can be beneficial to plans seeking to understand and potentially react faster – and with more confidence - to moves in the market.
“As more and more of our clients have adopted customized glide paths, the need for daily monitoring in order not to miss intra-month opportunities has become more evident, especially given the volatility in rates,” says Roberts. “Using PFaroe means that we can recognize immediately when certain triggers have been breached, and then conduct timely asset allocation analysis. More often than not, this means selling assets from the return-seeking portfolio and buying assets in the liability-hedging portfolio, locking-in funding improvements by taking advantage of opportunities to reduce risk. Monitoring on a daily basis increases the potential number of opportunities to take action.”
NEPC has a number of triggers in place for its clients – mainly relating to funding level, although other variables such as interest rate movements or simple time-based triggers can be utilized as well. Once a trigger has been breached, PFaroe alerts NEPC and/or the client immediately – allowing the consultant to open a discussion with the client in question. While this may not always drive changes in asset allocation – especially for clients with a high proportion of illiquid assets – the conversation is valuable and educational to the client, often informing future decisions and strategies.
2. Asset-liability studies
PFaroe also aids NEPC when conducting asset-liability and other forecasting studies, producing projections on a stochastic or deterministic basis, as well as analysing the impact of changing investment strategy and contributions, and comparing alternative options. Crucially, PFaroe provides a consistency in methodology. All data and assumptions are built into PFaroe and used across all elements of the analytics. This provides clients with confidence in the numbers and analysis.
Roberts says: “We typically would use PFaroe to look at funded status on an accounting and funding metric over a five-to-ten year period, looking at the relationship between contributions and benefit payments and modelling alternative allocations. PFaroe has allowed us to improve our stochastic modelling, and delve deeper into scenario analysis.”
A recent asset liability study for a high-profile client was a case in point, with NEPC looking at ways in which the plan could maintain a reasonable rate of return while increasing its hedge ratio, using assets more efficiently to generate similar or better results. PFaroe illustrated the trade-off in an easy to understand form – through stochastic analysis – between a higher hedge ratio and the impact on returns, while also highlighting the impact from a contribution risk stand-point.
Mark Cintolo, Senior Research Consultant, adds: “From the get-go, PFaroe allows us to run analysis in a consistent fashion far quicker than before. And thereafter, once clients have been modelled on the system, we can re-run analysis quickly and efficiently. While such a re-run would have previously been a drain on resources, we can now modify previous studies to assess the value of a lump sum offer, for instance, or take another look at the study after meaningful demographic changes have taken place.”
“This speed of analysis provides us with an interesting proposition,” comments Roberts. “In the past, when clients would ask for customized scenarios, we’d have to go away, build a model, and return two weeks later. Now, we can turn it around in front of their eyes.”
Since signing with RiskFirst, NEPC has been methodical in its roll-out; selectively offering the analytics platform to existing clients and potential clients, especially those with glide-paths or those engaged in LDI. At the same time, NEPC has focussed on targeted internal training in order to get to a point where the firm has the right knowledge, processes and team in order to be able to on-board clients quickly and easily.
Roberts says: “Early on we identified a team of five people – which we term our “super-user group” – to be charged with developing a deep understanding of the system, and acting as the primary point of contact for internal requests and RiskFirst. Through this, we now have a group of highly-trained people who use the system every day and have a firm grip on how it is best employed for NEPC’s clients.”
Amanda Flemming, Senior Analyst, adds: “The super-user group started with an initial training session, followed by meetings every other week with RiskFirst. RiskFirst’s support and experience in working with similar organisations as NEPC has helped us develop internal training and education materials for other consultants and analysts to use, in order that our clients get the very best from the system.”
Designating a small team focused on the implementation and synchronization of the PFaroe platform with its existing monitoring and modelling capabilities has enabled NEPC to quickly and efficiently build up its expertise with the platform and offer a consistent level of training, onboarding and usage by clients.
As NEPC continues to expand its use of RiskFirst’s PFaroe platform across its current and future client base, including a variety of client types (Corporate, Healthcare, and Utilities among others), the super-user group provides clients and NEPC consultants with the necessary support to ensure a timely and coordinated implementation.