What is surplus at risk (SaR) and how is it calculated for a pension plan?

Question

AcadiFi · Accepted Answer

Surplus at risk (SaR) is the potential decline in plan surplus (assets minus liabilities) over a specified horizon at a specified confidence level. Unlike asset VaR which only considers asset volatility, SaR captures the volatility of the gap — critical because liabilities move with rates and inflation too, and sometimes offset or amplify asset moves. Computation: treat the surplus as Assets - Liabilities and compute its standard deviation from a joint return distribution. For Vintry Halewood Retirement System with $6.5B assets, $7.1B liabilities (funded 91.5%), 60/40 RS/LDI split, one-year surplus standard deviation might be $980M, yielding a 95% SaR of 1.645 x $980M = $1.61B. This means there's a 5% chance that surplus could deteriorate by more than $1.61B over the year. Key inputs: asset class volatilities and correlations, liability duration and convexity, rate and inflation volatility, and cross-correlations between asset returns and liability drivers. Rate-up scenarios typically improve surplus (liabilities fall faster than hedged bonds if under-hedged; falling rates hurt surplus). SaR can be decomposed by risk factor — rate risk, equity risk, credit risk — helping the board understand what drives volatility. Stressed SaR (using 2008 or 2020 scenarios) gives tail perspective. Use SaR to set allocation policy and glidepath triggers: maybe de-risk when SaR exceeds $2B. Our CFA Level III institutional lessons include multi-factor SaR simulations.

What is surplus at risk (SaR) and how is it calculated for a pension plan?

Master Level III with our CFA Course

Related Questions

Practice Questions