Value at risk (VaR) calculation details

A VaR calculation is a common method for assessing the size and likelihood of potential risks happening over a defined period of time. It is often calculated by the scheme actuary or investment consultant and may have been calculated as part of the actuarial valuation or investment strategy review. This should typically be an estimate of the additional deficit which could occur over a period and with a certain level of probability.

You may need to refer to the investment report which contains the VaR calculation in order to answer the subsequent questions and so having a copy in front of you may be helpful. Alternatively, the scheme actuary or investment adviser should be able to provide the necessary information or guidance.

Please note that if you are not in a position to provide a VaR figure, TPR will assess the scheme’s investment risk by reference to the allocation between different asset classes without any allowance for interest rate, inflation or other types of hedging that might be in place.

Value at risk (VaR) calculation

 This should typically be an estimate of the additional deficit which could occur over a period and with a certain level of probability. If you do not have the VaR calculated as at the effective date of the most recent Part 3 valuation date, then please supply the most recent calculation for the scheme.

If you have multiple VaR calculations, please provide the 1 year 95% VaR on a Gilts/swaps basis with no additional margin. Otherwise please provide the details for the one most used by the scheme (see subsequent questions for more information regarding VaR bases)

If the scheme commissions VaR numbers including and excluding longevity risk, please provide the VaR calculation which excludes the impact of longevity risk. Otherwise, please provide us with the VaR calculation that you have (even if it does include the impact of longevity risk).

VaR liability basis

When calculating VaR and the impact of different economic scenarios, in order to measure the potential change in deficit it is necessary to fix the basis on which the liabilities are measured.

This is normally done by assuming the discount rate used for the purpose of the VaR calculation is based on a fixed margin above or below a reference basis - such as Gilt yields. Please select the liability basis that best describes the one that has been used to calculate the VaR. If the basis used to calculate the VaR does not fit within categories a,b,c or d then please select “e - Other” and provide further information regarding the liability basis in the subsequent follow up question.

If you are unsure of the basis on which the VaR has been calculated then the scheme actuary or investment adviser should be able to provide the necessary information or guidance.

VaR percentile (%)

For instance the typical VaR numbers are calculated as a 95th percentile or 95% level which is intended to model the deficit that could arise in the worst 1 in 20 situation.

Other variations include the 90% level (or 90th percentile) which models the worst 1 in 10 situations.

VaR period (in years)

 Typically calculations for VaR are undertaken on a 1 year or 3 year basis. However schemes can use longer periods over which to project the VaR numbers. Please state the period over which your scheme’s VaR is calculated.