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The Ups and Downs of Stochastic Modelling

 

As a follow-up to their recent report prepared for CUPE (see posting on Coalition's web-site of 31 July 2015 - "CUPE Holding Premier to Campaign Promises") PBI Actuarial Consultants have posted another article examining "Stochastic Modelling."

The article emphasizes that the success of achieving the forecasted outcomes (only 2.5% chance your base pension will be reduced and pension increases will be at least 75% of the CPI) depends very much on the trustees sticking with the original investment policy when the modelling occurred, even if undesired results are achieved in the short term. To change the investment policy invalidates the results of the stochastic modelling risk for subsequent years. 

The article goes on to state "Even the most sophisticated stochastic model will produce misleading results if you’re not careful when you set the inputs." And "However, relying too heavily on stochastic modelling can create a false sense of accuracy and a tendency for trustees to be less prepared to address downside risk and short-term volatility." 

Now that it appears the financial markets may have turned somewhat, for the worse, how does the future security for our "previously promised/guaranteed" benefits look?  Would government, in today's climate, present the Shared Risk plan with the same degree of certainty it did in late 2012? 

The full most recent article is here http://www.benefitscanada.com/uncategorized/the-ups-and-downs-of-stochastic-modelling-75708

Pension Coalition NB