Case Study from Harvard Business Publishing: Asset Allocation at the Cook County Pension Fund

Questions: Please answer the following with work in Excel, Thank you!

1. Build a model to simulate the solvency of the pension fund through 2040. Use the market value of the fund at the end of 2016 as the starting point for your simulation. Next, simulate the market value of the fund through the end of 2017. To do so, you will need to account for: a. Deductions from the pension that will be made in 2017 to pay out benefits to current retirees. To compute 2017 deductions, use the amount of 2016 deductions provided in the case and assume it grows by a constant annual growth rate. b. Contributions that will be made to the fund in 2017. In your projections, separate the supplementary contributions made by the County from required contributions by the County and its employees. For example, in 2016, total contributions to the fund were $659.3 million (Exhibit 8). Of that $659.3 million, $270.5 million was a supplementary contribution made by Cook County and the remaining $388.8 million were required contributions by the County and its employees. Make assumption on how often and/or how big the Cook County can offer supplementary contribution. c. Investment returns by the fund. Assume that annual returns are normally distributed. First build your simulator by assuming an arbitrary mean and standard deviation, then adjust the inputs afterwards. In addition, assume that investment returns are realized before any contributions and deductions are made in 2017. Once you simulate the end of 2017 asset value for the fund, re-do your analysis for 2018, 2019, and all the way out to 2040 and repeat this 100 times and make reasonable assumptions in the process. Clearly state what assumptions you made and reason why you made those assumptions.

2. Historically, what have been the risks and rewards of the asset classes that Hackett can invest in? Use standard deviation to measure of risk and average return to measure reward.

3. Assume that historical performance is a good indication of future performance. Based on your simulation, how does investment into each asset class impact the probability of fund survival? Or, what is the probability of survival among 100 simulations for each asset class assuming the pension fund decided to invest in one asset class and invest 100% of their assets in it?

4. Is it reasonable to assume that past performance is a good indication of future performance? Is there a specific asset class that you would be wary of using past performance as a good indication of future performance? Why or why not?

5. What should Hackett do with the portfolio? Are there other options that Cook County should explore