The Victoria-Volksbanken Pensionskassen is a multi-employer pension fund offering DB and DC pension schemes. The administered plans are funded both by employer and employee contributions.
With a capital value topping E308m at the end of 2002, its major shareholders are Österreichische Volksbanken, Victoria Volksbanken Versicherungs and ERGO International für Beteiligungen. Victoria-Volksbanken is the Austrian partner of IGP, the international insurance network. A dedicated team at Österreichische Volksbanken handles all asset management, and one member of the three-person board is also head of the portfolio management team. Österreichische Volksbanken is also the fund’s custodian, and all back-office services are bundled into a separate subsidiary (BOG) that is strictly separated from the front-office units.
The major objective of the fund is to service clients by delivering sound, long-run investment returns on a risk-adjusted basis, at the same time as it provides an efficient administration. It aims to offer personal and skilled advisory services and consultation, along with provision of topical information especially using electronic media. The past few years have seen a drive to improve the user-friendliness of both internet and client-based intranet solutions.
The client base for the fund is drawn from many Austrian subsidiaries of multinational companies as well as prestigious Austrian companies and institutions. There are more than 14,000 active members, 1,321 retirees and 1,113 deferred members.

Asset liability modelling
Asset liability matching is based upon the approved business plan of the fund, which includes mortality tables and actuarial principles that are official approved by the Financial Market Authority of the Federal Ministry of Finance. However, in some very complex cases, external actuarial consultants may be called in, although no external mandates have been issued so far.

Investment strategy
Asset management is outsourced to a dedicated team at Österreichische Volksbanken, the fund’s major shareholder. The bond allocation is primarily managed via segregated accounts, but equity investments are made via mutual funds. The investment philosophy is based on a multi-manager approach. The market is segmented applying regional and style criteria, then a thorough screening process, using quantitative and qualitative criteria, identifies funds with excellent management and the potential to deliver superior risk-adjusted returns on a long-term basis.
Around 25% of assets are invested in equities, of which 50% are European, 35% are North American, and the remaining 15% are Far Eastern, including Japan. Bonds are primarily European, with only 5% invested in North America. Around 5% is held in cash and another 5% in hedge funds.
The asset selection process was enhanced this year by further refinements of an already extensive due diligence process. To increase the transparency of the selection process and the comparability between different investment alternatives, detailed proprietary scoring models are used.

Risk management
The investment policy framework is based on a return objective that must be consistent with a risk objective. The return objective incorporates the minimum required return, and the risk objective incorporates the maximum accepted shortfall of meeting the minimum required return. As the risk tolerance of the fund varies in the course of time, the return target for predefined periods is flexible. Any change in the risk tolerance has a direct effect on the risk profile (and thus the composition of the portfolio). The fund uses automated systems to monitor and ensure that portfolios are within their predefined limits.
On-going risk management comprises fund monitoring (style mix, consistency, benchmark deviation) and portfolio monitoring (performance analysis, contribution, deviation monitoring). A proprietary risk management tool also helps to identify the current risk profile in conjunction with the liability structure of the fund. The risk management system performs daily calculations of the fund’s current risk profile, ensuring compliance with the fund’s risk tolerance.

Highlights and achievements
The new proprietary risk management tool has been a great success so far. The system is set up using risk/return estimates for each asset class and the correlations between the different classes. The output delivers the maximum level of risk underlying a confidence level of 95%. On a daily basis, the results are matched with the current asset allocation. Each deviation from predefined limits is highlighted and triggers a change of the asset allocation structure. Several backtests as well as Monte Carlo simulations provided the strength of the tool.
The Monte Carlo approach was chosen because it is a flexible state-of-the-art instrument that is not constrained by assumptions about overall asset returns. Daily simulations provide a continuous check of the portfolios, ensuring that portfolio structures remain in line with predefined risk limits. Portfolio managers are required to adapt immediately in the case of any violation of the risk objectives. A separate tool has been developed for the portfolio managers to quantify the risk impact of changing an asset class allocation or security.
This risk management model has several strengths. Portfolio managers know their risk and risk budget on a daily basis, and their own simulation tool unveils the impact of any management decisions. The decision about which assets have to be sold is still made by the portfolio managers, which takes an assessment of market conditions into account, while pure management of the equity exposure neglects this. The model also forces the fund to adapt the overall risk profile to market conditions: in bear markets, risk assets have to be scaled down, but when market conditions improve, risk tolerance usually rises.

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