Pension Surplus Risk Index
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The PSRX is a forward-looking estimate of the funded status volatility of US corporate defined benefit pension plans. The index level represents a one standard deviation change in funded status over a one year horizon, based on the average of the 100 largest pension plans1. For example, an index value of 15% suggests approximately a one in three chance that a $1 billion plan could lose or gain more than 15%, or $150 million, in funded status in one year2.
From a risk management perspective, the primary shortcoming of many existing pension indices is that they are backward-looking in nature. The PSRX, based on current implied volatility data from option markets, is a forward-looking estimate of funded status volatility. We believe the PSRX, sector indices and Pension Risk Calculator will provide a useful risk measure for CFOs, Treasurers and plan fiduciaries to gauge their pension risk’s influence on enterprise risk, implications for capital structure, and level of beneficiary security, respectively.
The PSRX constituent pension plans represent approximately $1.1 trillion of assets and $1.4 trillion of pension liabilities.
The PSRX methodology calculates the funded status volatility individually for the largest 100 pension plans1. The PSRX represents the arithmetic average of these volatilities.
In addition to the PSRX, NISA reports the 90th and 10th percentile funded status volatilities within the largest 100 plans1.
In addition to the primary index, NISA provides a table of the risk levels of the major industry sectors, or sector indices. The methodology for calculating the sector indices is identical to the PSRX, but narrowed to only include constituents in the given sector.
Please refer to the Supplemental Data section for more information.
The Pension Risk Calculator allows individual plans to determine a volatility level comparable to the PSRX that more closely corresponds to their circumstances. NISA can also provide a more-detailed customized analysis based on plan specific data. Please contact a NISA client service representative to discuss such an analysis.
The PSRX is calculated on a monthly basis and typically released on the sixth business day following month end. Please refer to the Methodology section or PSRX Guide for more details. An email subscription is also offered.
What happened to the sub-indices?
The sub-indices are now the basis for the Pension Risk Calculator.
The Pension Risk Calculator allows for selection of a return-seeking asset allocation percentage. Return-seeking assets are represented by the following blend of asset classes, derived from the average asset allocation for the PSRX constituent plans:
- 40% Large Cap US Equity
- 3% Small Cap US Equity
- 29% Developed Equity
- 4% Emerging Market Equity
- 8% Real Estate
- 9% Hedge Funds
- 8% Private Equity
Remaining assets are assumed to be in fixed income in an equal blend of long Treasuries and long credit.
The liability is discounted on a AA corporate curve for the PSRX, sector indices, and Pension Risk Calculator. Additional information on the liability and portfolio construction for the PSRX can be found in the PSRX Guide.
1 As determined by NISA based on publicly available information.
2 Based on common simplifying assumptions, including normal distributions, approximately zero expected surplus return, etc. Please see PSRX Guide for more detailed descriptions.