Dynamic Asset Liability Management: A Profit Testing Model for Swiss Pension Funds

Profit Testing, an established concept in the life insurance industry, is developed and applied to self-governed (self-insured) DC pension schemes in Switzerland. The dynamics of the pension scheme’s population are modeled by Markov chains. This allows for accurately capturing the impacts of different personnel policies such as reduction or increase of staff, promotion of early retirement etc. Profit profiles, cash flows, funding ratios and other key characteristics are calculated for DC schemes taking into account the Swiss regulatory framework. It is shown, that the close to reality modeling of the pension scheme’s dynamics within the Profit Testing Model provides an appropriate and reliable basis for asset-liability management and helps to determine the optimal investment strategy.

Keywords: Risk Control, Profit Testing, Asset Liability Management, Dynamic Pension Fund Modeling