Asset liability modelling and pension schemes: the application of robust optimization to USS

This paper uses a novel numerical optimization technique - robust optimization - that is well suited to solving the asset-liability management (ALM) problem for pension schemes. It requires the estimation of fewer stochastic parameters, reduces estimation risk and adopts a prudent approach to asset allocation. This study is the first to apply it to a real-world pension scheme, and the first ALM model of a pension scheme to maximise the Sharpe ratio. We disaggregate pension liabilities into three components - active members, deferred members and pensioners, and transform the optimal asset allocation into the scheme’s projected contribution rate. The robust optimization model is extended to include liabilities and used to derive optimal investment policies for the Universities Superannuation Scheme (USS), benchmarked against the Sharpe and Tint, Bayes-Stein, and Black-Litterman models as well as the actual USS investment decisions. Over a 144 month out-of-sample period robust optimization is superior to the four benchmarks across 20 performance criteria, and has a remarkably stable asset allocation – essentially fix-mix. These conclusions are supported by six robustness checks.

Pension scheme redesign and wealth redistribution between the members and sponsor: the USS rule change in October 2011

The redesign of defined benefit pension schemes usually results in a substantial redistribution of wealth between age cohorts of members, pensioners, and the sponsor. This is the first study to quantify the redistributive effects of a rule change by a real world scheme (the Universities Superannuation Scheme, USS) where the sponsor underwrites the pension promise. In October 2011 USS closed its final salary scheme to new members, opened a career average revalued earnings (CARE) section, and moved to ‘cap and share’ contribution rates. We find that the pre-October 2011 scheme was not viable in the long run, while the post-October 2011 scheme is probably viable in the long run, but faces medium term problems. In October 2011 future members of USS lost 65% of their pension wealth (or roughly £100,000 per head), equivalent to a reduction of roughly 11% in their total compensation, while those aged over 57 years lost almost nothing. The riskiness of the pension wealth of future members increased by a third, while the riskiness of the present value of the sponsor’s future contributions reduced by 10%. Finally, the sponsor’s wealth increased by about £32.5 billion, equivalent to a reduction of 26% in their pension costs.

Essays on robust portfolio selection and pension finance

This thesis examines three different, but related problems in the broad area of portfolio management for long-term institutional investors, and focuses mainly on the case of pension funds. The first idea (Chapter 3) is the application of a novel numerical technique – robust optimization – to a real-world pension scheme (the Universities Superannuation Scheme, USS) for first time. The corresponding empirical results are supported by many robustness checks and several benchmarks such as the Bayes-Stein and Black-Litterman models that are also applied for first time in a pension ALM framework, the Sharpe and Tint model and the actual USS asset allocations. The second idea presented in Chapter 4 is the investigation of whether the selection of the portfolio construction strategy matters in the SRI industry, an issue of great importance for long term investors. This study applies a variety of optimal and naïve portfolio diversification techniques to the same SRI-screened universe, and gives some answers to the question of which portfolio strategies tend to create superior SRI portfolios. Finally, the third idea (Chapter 5) compares the performance of a real-world pension scheme (USS) before and after the recent major changes in the pension rules under different dynamic asset allocation strategies and the fixed-mix portfolio approach and quantifies the redistributive effects between various stakeholders. Although this study deals with a specific pension scheme, the methodology can be applied by other major pension schemes in countries such as the UK and USA that have changed their rules.

Attitudes of landscape professionals towards naturalistic versus formal urban landscapes in the UK

The last 30 years have seen a tide of interest sweeping across Europe in the development of nature in cities, and an increasing amount of landscape development in urban areas has involved the use of 'naturalistic' styles. This is an increasing attempt to find ways for urbanism and nature to co-exist. However, there have been considerable discussions among professionals regarding the advantages and disadvantages of 'naturalistic' styles in urban areas. This research examines professional attitudes to 'naturalistic' landscape styles in Britain, in contrast to more traditional, formal landscape styles, and aims to find out whether the interest in natural landscapes is really a fashion among landscape professionals. A self-administered postal survey was carried out using both quantitative and qualitative data collection techniques and analysis. The survey included 500 professionals from parks and recreation departments of local authorities, private landscape practices and conservation trusts, and resulted in a satisfactory response rate of 53 %. The results of this study suggested that professionals recognise most of the values attached to naturalistic landscapes in urban areas. However, possible benefits that natural areas may have for urban people are not attached to naturalistic landscapes alone. The study also revealed that the naturalistic style is highly popular among conservation trusts but is less so among professionals from local authorities and private landscape practices who seem to appreciate both styles and believe that these styles are not separable from each other and should co-exist in an urban environment. (C) 2006 Elsevier B.V. All rights reserved.

The business case development process in the delivery of NHS infrastructure

There is a lack of knowledge base in relation to experiences gained and lessons learnt from previously executed National Health Service (NHS) infrastructure projects in the UK. This is in part a feature of one-off construction projects, which typify healthcare infrastructure, and in part due to the absence of a suitable method for conveying such information. The complexity of infrastructure delivery process in the NHS makes the construction of healthcare buildings a formidable task. This is particularly the case for the NHS trusts who have little or no experience of construction projects. To facilitate understanding a most important aspect of the delivery process, which is the preparation of a capital investment proposal; steps taken in developing the business case for an NHS healthcare facility are examined. The context for such examination is provided by the planning process of a healthcare project, studied retrospectively. The process is analysed using a social science based method called ‘building stories’, developed at the University of California-Berkeley. By applying this method, stories or narratives are constructed around the data captured on the case study. The findings indicate that the business case process may be used to justify, rather than identify, trusts’ requirements. The study is useful for UK public sector clients as well as consultants and professionals who aim to participate in the delivery of healthcare infrastructure projects in the UK.

Description of a multifaceted strategy for recruiting general practitioners and community pharmacists to talk about medication errors

Objective: To describe the use of a multifaceted strategy for recruiting general practitioners (GPs) and community pharmacists to talk about medication errors which have resulted in preventable drug-related admissions to hospital. This is a potentially sensitive subject with medicolegal implications. Setting: Four primary care trusts and one teaching hospital in the UK. Method: Letters were mailed to community pharmacists and general practitioners asking for provisional consent to be interviewed and permission to contact them again should a patient be admitted to hospital as a result of a medication error. In addition, GPs were asked for permission to approach their patients should they be admitted to hospital. A multifaceted approach to recruitment was used including gaining support for the study from professional defence agencies and local champions. Key findings: Eighty-five percent (310/385) of GPs and 62% (93/149) of community pharmacists responded to the letters. Eighty-five percent (266/310) of GPs who responded and 81% (75/93) of community pharmacists who responded gave provisional consent to participate in interviews. All GPs (14 out of 14) and community pharmacists (10 out of 10) who were subsequently asked to participate, when patients were admitted to hospital, agreed to be interviewed. Conclusion: The multifaceted approach to recruitment was associated with an impressive response when asking healthcare professionals to be interviewed about medication errors which have resulted in preventable drug-related morbidity.

Childhood obesity: should primary school children be routinely screened? A systematic review and discussion of the evidence

Background: Population monitoring has been introduced in UK primary schools in an effort to track the growing obesity epidemic. It has been argued that parents should be informed of their child's results, but is there evidence that moving from monitoring to screening would be effective? We describe what is known about the effectiveness of monitoring and screening for overweight and obesity in primary school children and highlight areas where evidence is lacking and research should be prioritised. Design: Systematic review with discussion of evidence gaps and future research. Data sources: Published and unpublished studies ( any language) from electronic databases ( inception to July 2005), clinical experts, Primary Care Trusts and Strategic Health Authorities, and reference lists of retrieved studies. Review methods: We included any study that evaluated measures of overweight and obesity as part of a population-level assessment and excluded studies whose primary outcome measure was prevalence. Results: There were no trials assessing the effectiveness of monitoring or screening for overweight and obesity. Studies focussed on the diagnostic accuracy of measurements. Information on the attitudes of children, parents and health professionals to monitoring was extremely sparse. Conclusions: Our review found a lack of data on the potential impact of population monitoring or screening for obesity and more research is indicated. Identification of effective weight reduction strategies for children and clarification of the role of preventative measures are priorities. It is difficult to see how screening to identify individual children can be justified without effective interventions.

Disruption of sitting balance after stroke: influence of spoken output

Objectives: To identify the extent of dual task interference between cognitive and motor tasks, (cognitive motor interference (CMI)) in sitting balance during recovery from stroke; to compare CMI in sitting balance between stroke and non-stroke groups; and to record any changes to CMI during sitting that correlate with functional recovery. Method: 36 patients from stroke rehabilitation settings in three NHS trusts. Healthy control group: 21 older volunteers. Measures of seated postural sway were taken in unsupported sitting positions, alone, or concurrently with either a repetitive utterance task or an oral word category generation task. Outcome measures were variability of sway area, path length of sway, and the number of valid words generated. Results: Stroke patients were generally less stable than controls during unsupported sitting tasks. They showed greater sway during repetitive speech compared with quiet sitting, but did not show increased instability to posture between repetitive speech and word category generation. When compared with controls, stroke patients experienced greater dual task interferences during repetitive utterance but not during word generation. Sway during repetitive speech was negatively correlated with concurrent function on the Barthel ADL index. Conclusions: The stroke patients showed postural instability and poor word generation skills. The results of this study show that the effort of verbal utterances alone was sufficient to disturb postural control early after stroke, and the extent of this instability correlated with concomitant Barthel ADL function.

The growth of private property vehicles in the UK: causes and conditions

The UK private indirect real estate market has seen a rapid growth in the last seven years. The gross asset value (GAV) of the private property vehicle (PPV) market has about tripled from a GAV of £22.6bn in 1998 to a GAV of £67.1 billion at the end of 2005 (OPC, 2006). Although this trend of growing syndication of real estate is not only a UK phenomenon, the rate of growth has been significantly faster in the UK. For example the German open-ended funds have grown over the same period from €50.4bn to €85.1bn (BVI, 2006). In the US the market capitalization of equity real estate investment trusts (REIT) has grown 155% since 1999 to US$ 301bn (NAREIT, 2006). Each jurisdiction is offering different formats to invest indirectly into real estate but at the core all these vehicles are the same in that they provide a different route for investors to access real estate. In the UK, although the range of ‘products’ is now quite diverse, all structures have in common the ‘wrapping’ of property assets into a multi-investor vehicle. This paper examines the nature, pattern and process of market growth in PPVs and constructs a series of associations between causes and effects to explain this market shift.

The impact of real estate on the terminal wealth of the UK mixed-asset portfolio

The argument for the inclusion of real estate in the mixed-asset portfolio has concentrated on examining its effect in reducing the portfolio risk - the time series standard deviation (TSSD), mainly using ex-post time series data. However, the past as such is not really relevant to the long-term institutional investors, such as the insurance companies and pension funds, who are more concerned the terminal wealth (TW) of their investments and the variability of this wealth, the terminal wealth standard deviation (TWSD), since it is from the TW of their investment portfolio that policyholders and pensioners will derive their benefits. These kinds of investors with particular holding period requirements will be less concerned about the within period volatility of their portfolios and more by the possibility that their portfolio returns will fail to finance their liabilities. This variability in TW will be closely linked to the risk of shortfall in the quantity of assets needed to match the institution’s liabilities. The question remains therefore can real estate enhance the TW of the mixed-asset portfolio and/or reduce the variability of the TW. This paper uses annual data from the United Kingdom (UK) for the period 1972-2001 to test whether real estate is an asset class that not only reduces ex-post portfolio risk but also enhances portfolio TW and/or reduces the variability of TW.

Liquidity in commercial property markets: deconstructing the transaction process

This paper draws from a wider research programme in the UK undertaken for the Investment Property Forum examining liquidity in commercial property. One aspect of liquidity is the process by which transactions occur including both how properties are selected for sale and the time taken to transact. The paper analyses data from three organisations; a property company, a major financial institution and an asset management company, formally a major public sector pension fund. The data covers three market states and includes sales completed in 1995, 2000 and 2002 in the UK. The research interviewed key individuals within the three organisations to identify any common patterns of activity within the sale process and also identified the timing of 187 actual transactions from inception of the sale to completion. The research developed a taxonomy of the transaction process. Interviews with vendors indicated that decisions to sell were a product of a combination of portfolio, specific property and market based issues. Properties were generally not kept in a “readiness for sale” state. The average time from first decision to sell the actual property to completion had a mean time of 298 days and a median of 190 days. It is concluded that this study may underestimate the true length of the time to transact for two reasons. Firstly, the pre-marketing period is rarely recorded in transaction files. Secondly, and more fundamentally, studies of sold properties may contain selection bias. The research indicated that vendors tended to sell properties which it was perceived could be sold at a ‘fair’ price in a reasonable period of time.

The Stonehenge landscape habitat restoration project: conservation opportunities for rare butterflies?

Landscape restoration has the potential to mitigate habitat loss and fragmentation. However, restoration can take decades to reach the ecological conditions of the target habitats. The National Trust’s Stonehenge Landscape Restoration Project provides an opportunity to evaluate the ecological benefits against the economic and temporal costs. A field survey between June and September 2010 using Lepidoptera as bio-indicators showed that restored grasslands can approach the ecological conditions of the target chalk grassland habitat within 10 years. However, specialist species like Lysandra bellargus (Adonis blue) were absent from restored grasslands and may require additional management to assist their colonisation. Analysis of the Lepidoptera communities showed that both small-scale habitat heterogeneity and age of the habitat were important for explaining Lepidoptera occurrence. These results demonstrate that habitat restoration at the landscape scale combined with appropriate site-scale management can be a relatively rapid and effective method to restore ecological networks and buffer against future climate change.