Welfare analysis of conditional indexation schemes from a two-reference-point perspective

2008 ◽  
Vol 8 (3) ◽  
pp. 321-350 ◽  
Author(s):  
RENXIANG DAI ◽  
J.M. SCHUMACHER
Keyword(s):  
Life Cycle ◽  
Continuous Time ◽  
Reference Point ◽  
Welfare Analysis ◽  
Pension Funds ◽  
Contingent Claim ◽  
Investment Strategies ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Middle Way

AbstractConditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.

scholarly journals The Influence of Pension Scheme Maturity on Investment Strategies of Pension Funds in Kenya

2018 ◽  
Vol 13 (10) ◽  
pp. 1
Author(s):  
Wilson Ngugi ◽  
Amos Njuguna ◽  
Francis Wambalaba
Keyword(s):  
Secondary Data ◽  
Pension Funds ◽  
Pension Scheme ◽  
Investment Strategies ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Retirement Benefits ◽  
Risky Assets ◽  
Life Cycle Theory ◽  
Funding Risk

The longevity risk borne by members of defined contribution pension schemes and the funding risk borne by sponsors of defined benefit pension funds have shifted attention to the investment strategies employed by pension funds. We use secondary data from 206 occupational retirement benefits schemes in Kenya, to examine the influence of pension scheme maturity on investment strategies. We then triangulate the results using focused group discussions with industry experts. Results from the regression models indicate that scheme maturity does not influence the investment strategies of occupation schemes in Kenya contrary to life cycle theory. The Retirement Benefits Authority and trustees of retirement benefits schemes in Kenya are advised to offer members’ investment choices coupled with education to enable them make decisions to reduce their exposure to risky assets as they age.

scholarly journals Nexus Between Pension Fund Size, Design and Investment Strategy: A Review of Occupational Retirement Benefits Schemes in Kenya

2018 ◽  
Vol 9 (3) ◽  
pp. 108 ◽  
Author(s):  
Wilson Ngugi ◽  
Amos Njuguna
Keyword(s):  
Secondary Data ◽  
Investment Strategy ◽  
Pension Funds ◽  
Investment Strategies ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Retirement Benefits ◽  
Retirement Benefit ◽  
Fund Size ◽  
Funding Risk

The funding risk borne by sponsors of defined benefit pension funds and the residual risk borne by members of defined contribution pension funds have necessitated focus on the investment strategies employed by pension funds. We use secondary data from 206 pension funds in Kenya, to determine the nexus between the investment strategy, size and design. We then validate the results using focused group discussions with industry experts. Results from the regression models indicate that larger schemes adopted a riskier investment strategies compared to their smaller counterparts. However, the investment strategies are not informed by the fund designs. Trustees of retirement benefit schemes are therefore advised to focus their investment strategies to avoid exposing the residual claimants to excessive risk.

A Comprehensive Review of the Evolution of Accounting Standards for State and Local Government Pensions and Other Postemployment Benefits in The United States

2019 ◽  
Vol 46 (1) ◽  
pp. 57-77
Author(s):  
Dale L. Flesher ◽  
Craig Foltin ◽  
Gary John Previts ◽  
Mary S. Stone
Keyword(s):  
United States ◽  
Local Government ◽  
Accounting Standards ◽  
The United States ◽  
Pension Funds ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
State And Local Government ◽  
State And Local

ABSTRACT Both the business media and the popular press have emphasized the underfunding problems associated with pension funds that are set aside for state and local government workers, a group that also includes teachers and professors at state-affiliated colleges and universities. The realization that pension funds are typically underfunded stems from the fact that the accounting standards associated with state and local government employee pension funds have led to greater transparency since 2011. This paper examines, explains, and interprets the historical development over the last 70 years of accounting standards for state and local government pension funds in the United States. Changing accounting standards, along with economic and social change, have led to consequences such as employers transforming their pension programs to avoid substantial costs and significant liabilities, for example by changing from defined benefit to defined contribution plans.

scholarly journals Optimal investment policies for defined benefit pension funds

2007 ◽  
Vol 6 (1) ◽  
pp. 1-20 ◽  
Author(s):  
ARJEN SIEGMANN
Keyword(s):  
Stock Returns ◽  
Reference Point ◽  
Risk Measure ◽  
Decision Rules ◽  
Optimal Investment ◽  
Pension Funds ◽  
Optimal Decision ◽  
Defined Benefit ◽  
Investment Policies ◽  
Increased Risk

This paper analyzes optimal investment policies for pension funds of a defined benefit (DB) type. The nature of a DB fund induces a natural modeling of preferences being of the mean-downside risk type. With compensation for inflation as an explicit goal of a pension fund, a natural reference point for the risk measure is the future (indexed) value of the liabilities. Results are presented for different levels of inflation uncertainty and its correlation with stock returns. The optimal decision rules show increased risk-taking for funding ratios moving away from the discounted value of the reference point. Furthermore, it is shown that the outcomes are comparable with those using a mean-downside deviation criterion. We provide intuition for the results and compare the outcomes with actual investment policies of six large Dutch pension funds.

Default investment strategies in a defined contribution pension system: a pension risk model application for the chilean case

2013 ◽  
Vol 12 (4) ◽  
pp. 379-414 ◽  
Author(s):  
SOLANGE BERSTEIN ◽  
OLGA FUENTES ◽  
FÉLIX VILLATORO
Keyword(s):  
Life Cycle ◽  
Risk Model ◽  
Pension System ◽  
Economic Behavior ◽  
Investment Strategies ◽  
Defined Contribution ◽  
Practical Applications ◽  
Dominated Strategies ◽  
Wide Range ◽  
Gain Loss

AbstractIn a defined contribution pension system, one of the main risks faced by members refers to the investment of funds. In this context, we discuss which is the most suitable risk measurement for the affiliates to the pension system. Different life-cycle investment strategies are evaluated under this measure for different types of workers. We point out the importance of designing well-suited default investment options in light of the economic behavior of members, characterized by low financial knowledge, inertia and myopia in decision-making. We calibrate a pension risk model for the Chilean economy, including measures of life-cycle income, human capital risk, investment and annuitization risks. Our results suggest that affiliates can gain (loss) around 0.85 percentage points in terms of average replacement rates in return for an increase (decrease) of 1 percentage point in risk, measured as standard deviation of replacement rates. Using a stochastic dominance analysis, we find that there are no dominated strategies when subsidies from the Solidarity Pillar are excluded. When the Solidarity Pillar is considered, the most appropriate investment strategies for affiliates that receive these subsidies are concentrated on the riskier funds. However, this also means that there could be increased pressure on Government spending in order to grant additional benefits to affiliates. Our model has a wide range of practical applications that go from informing affiliates about the degree of uncertainty associated to their expected replacement rate to a guide to evaluate how different investment strategies affect the expected values of affiliates' pensions and their associated risk.

Entity-wide risk management for pension funds

2012 ◽  
Vol 17 (2) ◽  
pp. 331-394 ◽  
Author(s):  
M. H. D. Kemp ◽  
C. C. Patel
Keyword(s):  
Risk Management ◽  
Holistic Approach ◽  
Pension Funds ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Pension Fund Management ◽  
Enterprise Risk ◽  
New Business ◽  
Business Enterprises ◽  
Managing Risk

AbstractThis paper explores the application of ERM-style techniques to pension funds. It uses the term ‘entity-wide risk management’ rather than ‘enterprise risk management’, even though both have the same acronym (‘ERM’), because many pension funds do not view themselves as business ‘enterprises’ as such. Some of the techniques that business enterprises have for managing risk (e.g. raising new capital from shareholders or branching into new business areas if existing ones have unattractive risk-reward characteristics) may not be open to many pension funds. The paper argues that the holistic approach to risk management (and governance) that is a hallmark of ERM is as appropriate to pension funds as it is to any other type of entity. This is the case whether the fund is defined benefit or defined contribution in nature, or a hybrid. It is also the case whether the ‘entity’ is deemed to be the fund itself, the sponsor or the two combined. Indeed, there are aspects of pension arrangements, such as the relationship between the fund and its sponsor, that lend added impetus to the use of ERM-style techniques in practical pension fund management.

Pension fund governance: expertise and organizational form

2004 ◽  
Vol 3 (2) ◽  
pp. 233-253 ◽  
Author(s):  
GORDON L. CLARK
Keyword(s):  
Pension Fund ◽  
Codes Of Conduct ◽  
Pension Funds ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Internal Governance ◽  
Codes Of Practice ◽  
Anglo American ◽  
Fund Governance ◽  
Equitable Treatment

Responsible for the welfare of beneficiaries, pension funds have many tasks and functions. Consequently, their governance and regulation are issues of public concern with direct bearing on the interests of stakeholders and ultimately the performance of Anglo-American financial markets. Subject to common law expectations regarding proper trustee behaviour, also important are statutory requirements regarding the equitable treatment of beneficiaries and the management of assets and liabilities. At one level, discretion is an essential attribute of the trust institution – trustees act on behalf of others not so well placed to manage their own long-term welfare because of lack of knowledge and/or ability. At another level, pension funds are presumably regulated by a well-defined purpose – the welfare of beneficiaries. In this paper, I look at the internal governance of pension funds emphasizing codes of practice, the rules and procedures for decision making, and trustee competence and expertise. While it is important to observe codes of conduct like those advocated by the OECD, there may be significant problems with any system of governance that relies upon rules and procedures. Inertia rather than innovation may be the net result. These issues are developed with reference to defined benefit and defined contribution schemes (and their variants). Ultimately, pension fund governance reflects, more often than not, its nineteenth-century antecedents rather than the financial imperatives of the twenty-first century.

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