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ERM for Pension Funds [23]

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Bullet points include: Same basic formula as for bond pricing, i.e. PV(risky bond) PV(riskless bond), PV, probability of default, LGD. But with a variable 'recovery' rate, hence variable Loss Given Default (LGD): Tangible assets provide some underpin and may be some recovery from sponsor. But assets, liabilities and LGD may vary through time. Valuation (from the perspective of members) perhaps more akin to a specialised (potentially path dependent) structured credit instrument exposure. Needing two (or more?) dimensional model, probability-weighting different economic scenarios and different times when sponsor might default. See e.g. Appendix B of this presentation and Nematrian online toolkit, e.g. www.nematrian.com/WebServiceExampleSpreadsheets.aspx?s=PFProject

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