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Gold AHA Winner in Liquidity Management

Building a Crystal Ball for the Pension Plan: Pfizer

Amit Singh, senior director of capital markets; Neal Masia, assistant treasurer and VP; John Croke, senior manager of pensions; Renje Kuo, manager of capital markets; and Colum Lane, director of pension investments
The defined-benefit (DB) pension plan is beginning to play a bigger role in liquidity forecasting and planning at $67 billion Pfizer. The financial crisis and slide in interest rates created volatility in the funded status of many DB plans. Pfizer’s plan was fully funded in 2006, but fell to 81% funded by 2011. While the company has made cash contributions to the plan to shore up the assets and while asset valuations have rebounded, these pluses have largely been offset by a sharp rise in pension liabilities resulting from lower discount rates.

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.

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