Wtp requires better model risk management

In the pension sector, the dependence on models is considerable. Models help, among other things, in making important strategic decisions, calculating actuarial pension liabilities and conducting ALM analyzes and risk assessment analyses.

With the introduction of the Future Pensions Act (Wtp), this dependence on models will increase even further, which increases the need for thorough model risk management. This is the process by which pension funds manage risks associated with the use of models. Model risk is the risk that a model does not deliver the correct results due to incorrect assumptions, inadequate data, incorrect implementation or incorrect use of the model. For pension funds, this means that strategic decisions may be based on incorrect or distorted information, with potentially far-reaching financial consequences.

The current model risk management framework of the Pension Federation, which was drawn up in 2015 and revised in 2021, provides pension funds with a basis. My question is whether this framework is still sufficient in the new situation, in which the Wtp leads to more complexity of schemes that pension funds have to offer to participants. This changes the objective, size and scope of current models. The vulnerability lies mainly in the new application of existing and new models during the transition.

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