Chapter 16: Asset liability management Flashcards
(1) A provider should select investments that are appropriate to the
nature
term
currency, and
uncertainty
of the liabilities, and
the provider’s appetite for risk.
Subject to (1), the investments should also be selected so as to maximise the overall return on the assets, where overall return includes both income and capital.
Categories we can split the liability outgo
guaranteed in money terms, i.e. benefit payments specified in money terms – premium / contribution income that is fixed in money terms
guaranteed in terms of a prices index or similar, i.e. benefit payments linked to an index + expense outgo that is real in nature – premium / contribution income that is linked to an index
discretionary benefit payments
investment-linked benefit payments.
Regulatory framework on mismatching
restrictions on the types of assets that a provider can invest in
restrictions on the amount of any particular type of asset that can be taken into account for the purpose of demonstrating solvency
a requirement to match assets and liabilities by currency
restrictions on the maximum exposure to a single counterparty custodianship of assets
a requirement to hold a certain proportion of total assets in a particular class, for example, government stock
a requirement to hold a mismatching reserve
a limit on the extent to which mismatching is allowed at all.
function and services provided by a custodian
The principal function of custody is to ensure that financial instruments are housed under a proper system that permits investment for proper purposes with proper authority.
Custodians are usually banks or other regulated institutions. Custodians offer not only custody of documents, but also a range of services such as:
income collection
tax recovery
cash management
securities settlement
foreign exchange
stock lending.
Also, the custodian will often exercise voting rights on behalf of the client.
