Pfizer recently decided to move from a DB plan to an enhanced savings plan, which will be completed by 2018. Until then, it needed a sophisticated, reliable model to support planning for pension liquidity and its earnings-per-share impact. The pension world is full of predictive models, but Pfizer wanted something more integrated and customized, so it built its own better mousetrap at a cost of over 500 man-hours.
Pfizer developed the pension liquidity model over several years and implemented it in the second quarter. The model does not produce a single forecast, but instead simulates thousands of equally likely future scenarios with confidence ranges around the scenarios, explains Amit Singh, senior director of capital markets. One big challenge is forecasting interest rates. “Due to their mean-reverting and stochastic nature, interest rates are difficult to simulate,” Singh notes. Pfizer chose the Hull-White method to calibrate to current market expectations for interest rates because it is forward-looking instead of historical, unlike most interest-rate models, he says.
The project team spent time with members of the controller’s group to be sure they understood the intricacies of GAAP accounting and built them into the model. While Pfizer’s model is independent, treasury tested its output against those of other models to see if there were any wild deviations (there weren’t). The model is built on an Excel spreadsheet loaded with RiskTM, an Excel add-in for Monte Carlo simulations, and uses FINCADTM financial software to build its Hull-White interest-rate model and calibrate it to current market expectations.
While the model’s main purpose is forecasting, it also improves asset allocation, which should bolster plan performance in the long run. It is not an asset optimization model, however.