Pension Surplus Risk Index

Methodology

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The PSRX reflects the average of the individual funded status volatilities for the index-constituent plans.  Constituent plans are:

•    US defined benefit corporate pension plans;
•    Publicly-traded;  and
•    The 100 largest plans based on pension liability present value (PBO), as determined by NISA from publicly available documents, and re-constituted annually.

The constituent plans represent approximately $1.1 trillion in assets and $1.4 trillion in liabilities in aggregate as of 12/31/15.

The PSRX asset allocation changes annually based on data provided in firms’ 10-Ks. The chart below shows allocations for the 2015 plan year as determined by NISA.
Annual Asset Allocation 2015

Deriving individual plan volatilities involves three main components:

1.    Plan-specific asset allocation and liability data, derived from publicly available sources;
2.    Implied volatilities for various markets from traded options; and
3.    Correlations between the various asset classes and liability components from historical data.

These three components provide the necessary inputs for a traditional portfolio volatility calculation; in this case the “portfolio” is the combination of both the assets and liabilities of the plan.

Index constituents are determined annually by NISA and updated with the April 30th index release.  Plans with poor data quality are removed from the index.  Each monthly index update reflects current implied volatility data from option markets, a “roll forward” of asset and liability figures to reflect market movements year to date, and updated correlation calculations.

Additional details regarding the calculation of the index can be found in the PSRX Guide.