How often will the assets at the end of the contract be sufficient? Three situations are considered, namely not enough (“Lo”), “acceptable” defined as upto £1,000 deflated too much (“OK”) or far too much (“Hi”).
If we reduce the acceptable margin, then that will increase the “Hi” region. For a fully inflation-protected endowment fully invested in conventional bonds, the MtM approach would have led to utter failure in 44.8% of 10,000 scenarios and to assets which are far too high in 48.6% of 10,000 scenarios. Only 6.6% of 10,000 scenarios would have been “acceptable” (see chart).