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.

Validation of ocean model syntheses against hydrography using a new web application

Results are presented from a new web application called OceanDIVA - Ocean Data Intercomparison and Visualization Application. This tool reads hydrographic profiles and ocean model output and presents the data on either depth levels or isotherms for viewing in Google Earth, or as probability density functions (PDFs) of regional model-data misfits. As part of the CLIVAR Global Synthesis and Observations Panel, an intercomparison of water mass properties of various ocean syntheses has been undertaken using OceanDIVA. Analysis of model-data misfits reveals significant differences between the water mass properties of the syntheses, such as the ability to capture mode water properties.

A comparison of the variability of biological nutrients against depth and potential density.

The main biogeochemical nutrient distributions, along with ambient ocean temperature and the light field, control ocean biological productivity. Observations of nutrients are much sparser than physical observations of temperature and salinity, yet it is critical to validate biogeochemical models against these sparse observations if we are to successfully model biological variability and trends. Here we use data from the Bermuda Atlantic Time-series Study and the World Ocean Database 2005 to demonstrate quantitatively that over the entire globe a significant fraction of the temporal variability of phosphate, silicate and nitrate within the oceans is correlated with water density. The temporal variability of these nutrients as a function of depth is almost always greater than as a function of potential density, with he largest reductions in variability found within the main pycnocline. The greater nutrient variability as a function of depth occurs when dynamical processes vertically displace nutrient and density fields together on shorter timescales than biological adjustments. These results show that dynamical processes can have a significant impact on the instantaneous nutrient distributions. These processes must therefore be considered when modeling biogeochemical systems, when comparing such models with observations, or when assimilating data into such models.