Scenario Modeling

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Scenario Modeling with Kelso

Explore how different assumptions and decisions impact your ESOP.

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What is Scenario Modeling?

Scenario modeling lets you test “what-if” questions:

• What if the company grows faster than expected?
• What if we change our vesting schedule?
• What if there’s a recession?
• What if we add diversification at age 55?

Kelso makes it easy to create, compare, and learn from different scenarios.

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Types of Scenarios

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Base Case

Your current reality:

• Actual participant data
• Current plan rules
• Historical trends
• Expected future assumptions

Purpose: Establish baseline for comparisons

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Optimistic Case

Better-than-expected outcomes:

• Higher valuation growth
• Lower turnover
• Stronger company performance
• Favorable demographics

Purpose: Understand upside potential

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Pessimistic Case

Challenging conditions:

• Economic downturn
• Valuation decline
• Higher turnover
• Operational challenges

Purpose: Stress test and identify risks

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Plan Design Alternatives

Different configuration options:

• Varied vesting schedules
• Alternative allocation formulas
• Different eligibility rules
• Modified distribution policies

Purpose: Evaluate proposed changes

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Strategic Alternatives

Major company decisions:

• Acquisition scenarios
• Growth strategies
• Restructuring plans
• Ownership transitions

Purpose: Model big picture changes

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Creating Scenarios

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Step 1: Start with Base Case

Begin with your current situation:

1. Enter participant census
2. Configure plan rules
3. Set baseline assumptions
4. Run initial forecast

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Step 2: Clone and Modify

Create variations:

1. Duplicate base case
2. Change specific assumptions
3. Name scenario descriptively
4. Document what you’re testing

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Step 3: Run and Compare

Analyze differences:

1. Run each scenario
2. Compare key metrics
3. Identify drivers of differences
4. Document insights

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Key Assumptions to Vary

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Valuation Growth

Impact: Major driver of obligations Test scenarios:

• Conservative: 3-5% annually
• Moderate: 6-8% annually
• Aggressive: 9-12% annually

Why it matters: Directly affects all account values

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Turnover Rates

Impact: Timing and size of distributions Test scenarios:

• Low turnover: Historical - 2%
• Medium: Historical average
• High turnover: Historical + 2%

Why it matters: Major determinant of obligation timing

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Retirement Ages

Impact: When obligations materialize Test scenarios:

• Early retirement: Age 60-62
• Normal retirement: Age 65
• Late retirement: Age 67-70

Why it matters: Shifts timing of peak obligations

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Contribution Levels

Impact: Cash available to fund obligations Test scenarios:

• Minimum required
• Historical average
• Maximum deductible

Why it matters: Determines ability to fund obligations

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Comparison Techniques

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Side-by-Side

View scenarios together:

• Obligation forecasts by year
• Cash flow requirements
• Participant account values
• Key metric comparison

Best for: Quick comparison of 2-3 scenarios

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Sensitivity Charts

Visual representation:

• Tornado charts showing impact
• Range charts showing outcomes
• Waterfall charts showing drivers

Best for: Understanding which assumptions matter most

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Probability Analysis

Monte Carlo simulation:

• Run hundreds of scenarios
• Show distribution of outcomes
• Identify likely ranges

Best for: Quantifying uncertainty

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Use Cases

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Annual Planning

Goal: Set next year’s contribution and validate assumptions Scenarios to model:

1. Base case (current assumptions)
2. Conservative (stressed assumptions)
3. Prior year comparison

Decisions supported:

• Appropriate contribution level
• Need for policy changes
• Board and trustee communication

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Strategic Planning

Goal: Evaluate multi-year strategy Scenarios to model:

1. Current strategy
2. Accelerated growth
3. Conservative approach
4. Acquisition scenarios

Decisions supported:

• Long-term sustainability
• Growth investments
• Risk mitigation needs

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Plan Design Changes

Goal: Evaluate proposed modifications Scenarios to model:

1. Current plan design
2. Proposed changes
3. Alternative options
4. Phased implementation

Decisions supported:

• Which changes to implement
• Timing of changes
• Communication approach

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Risk Assessment

Goal: Understand downside risks Scenarios to model:

1. Economic downturn
2. Valuation decline
3. Operational challenges
4. Demographic shifts

Decisions supported:

• Contingency planning
• Financing arrangements
• Board risk awareness

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Best Practices

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Name Scenarios Clearly

Use descriptive names:

• ✅ “2024 Base Case - 7% Growth”
• ✅ “Proposed 6-Year Vesting”
• ✅ “Recession Stress Test”
• ❌ “Scenario 1”
• ❌ “Test”

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Document Assumptions

For each scenario, record:

• What assumptions changed
• Why you’re testing this
• Who requested the analysis
• Date created

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Start Simple

Don’t change too many variables at once:

• Begin with one change
• Understand impact
• Add complexity gradually
• Keep some scenarios simple

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Save Important Scenarios

Preserve scenarios you’ll reference:

• Annual planning scenarios
• Board presentation analyses
• Trustee review scenarios
• Historical comparisons

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Review Regularly

Revisit scenarios over time:

• Compare forecasts to actuals
• Update assumptions
• Refine approach
• Improve accuracy

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Common Scenario Examples

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Growth Scenarios

Slow Growth:

• 3% valuation growth
• Flat participant count
• Conservative assumptions

Base Growth:

• 7% valuation growth
• 2% participant growth
• Expected assumptions

Rapid Growth:

• 12% valuation growth
• 5% participant growth
• Aggressive assumptions

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Economic Scenarios

Recession:

• 0-3% valuation growth
• 15% higher turnover
• Reduced contributions

Recovery:

• 5-7% growth
• Normalized turnover
• Increased contributions

Boom:

• 10%+ growth
• Lower turnover
• Maximum contributions

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Advanced Techniques

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Multi-Variable Testing

Change multiple assumptions:

• Matrix of combinations
• Identify interaction effects
• Find optimal configurations

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Custom Scenarios

Build unique situations:

• Specific succession plans
• Known upcoming changes
• Custom demographic shifts

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Historical Validation

Test past forecasts:

• Compare to actual results
• Understand error sources
• Improve future assumptions

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Get Started with Scenarios