Minimum funding ratios for defined-benefit pension funds

2010 ◽  
Vol 10 (3) ◽  
pp. 417-434 ◽  
Author(s):  
ARJEN SIEGMANN
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Pension Fund ◽  
Equity Premium ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Intergenerational Solidarity ◽  
Defined Contribution ◽  
Power Utility ◽  
Time Diversification

AbstractWe compute minimum nominal funding ratios for defined-benefit (DB) plans based on the expected utility that can be achieved in a defined-contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall, and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC scheme, minimum acceptable funding ratios are between 0.87 and 1.20 in nominal terms. For relative risk aversion of 5 and a DC scheme with a fixed-contribution setup, the minimum nominal funding ratio is between 0.87 and 0.98. The attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, providing time-diversification to its participants, can be large. Minimum funding ratios in real (inflation-adjusted) terms lie between 0.56 and 0.79. Given a DB pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1% point higher contribution on average to achieve equal expected utility.

scholarly journals The quantification of type-2 prudence in asset allocation by the trustees of a retirement fund

2016 ◽  
Vol 10 (2) ◽  
pp. 169-202
Author(s):  
Robert J. Thomson ◽  
Taryn L. Reddy
Keyword(s):  
Risk Aversion ◽  
Asset Allocation ◽  
Weighted Average ◽  
Expected Utility Theory ◽  
Model Parameters ◽  
Defined Benefit ◽  
Defined Contribution ◽  
New Class ◽  
Retirement Funds

AbstractIn this paper, consideration is given to the normative use of expected-utility theory for the purposes of asset allocation by the trustees of retirement funds. A distinction is drawn between “type-1 prudence”, which relates to deliberate conservatism on the part of actuaries in the setting of assumptions and the determination of model parameters, and “type-2 prudence”, which relates to the risk aversion of the trustees. The intention of the research was to quantify type-2 prudence for the purposes of asset allocation, both for defined-contribution (DC) and defined-benefit (DB) funds. The authors propose new definitions of the objective variables used as the argument of the utility function: one for DC funds and another for DB funds. A new class of utility functions, referred to as the “weighted average relative risk aversion” class is proposed. Practicalities of implementation are discussed. Illustrative results of the application of the method are presented, and it is shown that the proposed approach resolves the paradox of counter-intuitive results found in the literature regarding the sensitivity of the optimal asset allocation to the funding level of a DB fund.

scholarly journals Retirement Ages by Socio-Economic Class

Risks ◽  
2020 ◽  
Vol 8 (4) ◽  
pp. 102
Author(s):  
Séverine Arnold ◽  
Anca Jijiie
Keyword(s):  
Risk Aversion ◽  
Time Preference ◽  
Retirement Age ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Policy Makers ◽  
Economic Class ◽  
Notional Defined Contribution

We are interested in defining the optimal retirement age by socio-economic class, given a Defined Benefit and a Notional Defined Contribution scheme. We firstly implement a utilitarian framework. Depending on the risk aversion coefficients and individual time preference factors, the results differ significantly. Since this approach is individualistic, with no consensus in the existing literature on what values these parameters should take, it is not suitable to be used by policy makers. Therefore, we provide an alternative based on two accounts. We look for the retirement age allowing the accumulated value, at the last age with survivors, of the pensions received under each system, held in one account, to be close in value to the accumulated amount should the actuarially fair pension be paid, representing the second account. Our approach results in setting a lower retirement age for lower socio-economic classes and a higher retirement age for wealthier individuals.

scholarly journals The transition to NDC in Italy: assessing distributive and financial effects

2021 ◽  
pp. 1-16
Author(s):  
Carlo Mazzaferro
Keyword(s):  
Net Present Value ◽  
Pension System ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Ratio Distribution ◽  
Actuarial Fairness ◽  
Notional Defined Contribution ◽  
High Level ◽  
Pension Benefits

Abstract Moving from a Defined Benefit (DB) to a Notional Defined Contribution (NDC) pension formula creates significant re-distributive effects. We estimate the amount and the intensity of these effects in the case of the Italian transition to NDC, which began in 1995. Based on administrative data of the main Italian pension scheme (FPLD), we study the evolution of yearly inequality within old-age pension benefits. Furthermore, we study the adequacy and the actuarial fairness of the pension system, by estimating the replacement rates and the Net Present Value Ratio distribution for workers who retired in the period 1996–2019. Our results show that the very generous interpretation of acquired rights determined by the 1995 reform has contributed to maintaining a high level of adequacy and a significant level of intergenerational imbalance. The financial costs of this imbalance are estimated and its extent is significant.

scholarly journals South African pension fund conversions: Dealing with environmental change

2007 ◽  
Vol 7 (1) ◽  
Author(s):  
D. T. George ◽  
R. J.O. Joubert
Keyword(s):  
Environmental Change ◽  
South African ◽  
Pension Fund ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Structured Interviews ◽  
Value Analysis ◽  
Stakeholder Interests ◽  
Environmental Shock ◽  
Organisational Behaviour

Purpose: The purpose of this paper is to analyse South African pension fund conversions from defined benefit to defined contribution structures and to develop a model for dealing with environmental change. Design/Methodology/Approach: Qualitative research methodology was used. Industry experts were interviewed to obtain a macro view of the phenomenon and specific manifestations of the phenomenon were also considered in case studies.Feedback from semi-structured interviews was categorised into several emergent themes. Within-case and cross-case analyses were conducted. Findings: Results indicated that an environmental shock exerted a substantial influence on the course of events. Under these: Various factors combined to drive organisational evolution (i.e. adaptation to the environment). Adaptation speed was inappropriate and exceeded that which was required for sufficient thought. Uncertainty and vacuum circumstances arose leading to consequences that require redress. The relative power of the stakeholders changed and influenced the strategic outcome. An imbalance in stakeholder interests arose and ethical factors became consequential. Business acted to restore certainty for itself.Implications: This paper provides insight into organisational behaviour during periods of environmental shock. Environmental shock can be defined as "a condition that arises where business or societal rules are inadequate, or do not exist, to deal with unfolding events". An environmental shock has greater magnitude than a competitive shock, and can include several competitive shocks.Originality/Value: Analysis of pension fund conversions revealed organisational behaviour during periods of environmental shock and the emerging model can be applied in other instances of environmental shock, such as broad-based black economic empowerment (B-B BEE), land redistribution, sanctions and constitutional development.

scholarly journals The problematic nature of UK pension fund regulation: Performing governance at the expense of innovation

2020 ◽  
pp. 102452942097460
Author(s):  
Gordon L. Clark
Keyword(s):  
Financial Services ◽  
Pension Fund ◽  
Best Interests ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Dead End ◽  
Fit For Purpose ◽  
Board Decision Making ◽  
The Uk ◽  
Pension Adequacy

At the heart of UK pension fund regulation are quasi-compulsory codes of practices and tests of pension fund trustees’ competence. This regime of ‘soft’ regulation focuses upon the ‘performance’ of governance and is intrusive in terms of expected behaviour and board decision-making. Framed by defined benefit pension obligations in the private sector, it lacks rigorous standards of value when applied to defined contribution pensions. As such, pension ‘adequacy’ is discounted by the premium placed on performing governance in the market for financial services. The UK pension regime has hit a dead-end being neither fit-for-purpose in a world of technological disruption and financial turmoil nor capable of empowering those funds willing and able to innovate in the best interests of participants.

The Role and Responsibilities of Actuaries in the Defined Contribution Environment in the United Kingdom

1999 ◽  
Vol 5 (4) ◽  
pp. 763-800
Author(s):  
M.A. Stocker ◽  
S.D. Dudley ◽  
G.E. Finlay ◽  
H.J. Fisher ◽  
O. C. Harvey Wood ◽  
...  
Keyword(s):  
United Kingdom ◽  
Public Interest ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Current Role ◽  
Roles And Responsibilities ◽  
The Public ◽  
The United Kingdom ◽  
The Impact

ABSTRACTThis paper takes an overview of the potential roles and responsibilities of pension scheme actuaries in the United Kingdom in relation to defined contribution (DC) schemes.First it summarises briefly the background to UK retirement provision and in particular the move to DC arrangements. The paper then compares and contrasts the pension scheme actuary's current role in both defined benefit (DB) and DC schemes. This is then developed to consider what further statutory roles there may be for actuaries in DC schemes.The paper challenges the profession to champion the public interest by seeking clarity and simplification, and finally considers the impact on actuarial employment.

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.

scholarly journals The Distribution of Investment Risk in Defined Benefit Pension Plans: A Reconsideration

2005 ◽  
Vol 51 (1) ◽  
pp. 136-157
Author(s):  
Douglas E. Hyatt ◽  
James E. Pesando
Keyword(s):  
Empirical Evidence ◽  
Pension Fund ◽  
Fund Performance ◽  
Pension Plans ◽  
Investment Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
Defined Benefit Plans ◽  
Defined Benefit Pension Plans

The "textbook " description is that members of defined benefit pension plans bear no investment risk, in sharp contrast to members of defined contribution plans. Yet formal or informal bargaining may focus on the size of required employer contributions to a defined benefit plan. If at least some of the costs of such employer contributions are shifted back to workers, then members of defined benefit plans do bear investment risk. We utilize three sources of empirical evidence (a survey of pension specialists, econometric analysis, and case studies) to support the proposition that employees do bear at least some of the investment risk associated with pension fund performance. Poor fund performance leads to larger employer contributions to maintain the defined benefit obligation and this in turn leads to lower levels of other forms of compensation. We conclude that riskshifting does occur, in at least some plans, and that the textbook distinction is overstated.

scholarly journals PENERAPAN PORTOFOLIO INVESTASI ASET PROGAM DANA PENSIUN PADA OPTIMALISASI EXPECTED RETURN

2020 ◽  
Vol 5 (2) ◽  
pp. 131-144
Author(s):  
Dwi Jaya Kirana
Keyword(s):  
Asset Allocation ◽  
Financial Services ◽  
Pension Fund ◽  
Financial Institution ◽  
Total Sample ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Expected Return ◽  
Time Deposits ◽  
Negative Effect

This study aims to examine the implementation of pension fund asset allocation to equity, debt securities, time deposits, real estate, and others in determining expected returns. The samples used in this study are all listed companies that disclose the allocation of pension fund assets in 2016 -2018. The total sample is 93 companies. The analysis of this study uses multiple regression and statistical analysis of the Financial Services Authority (OJK). The results of the study show that all the variables of the allocation of pension fund assets have a significant effect on an expected return unless the other variables OTHER have a significant negative effect on expected return. The allocation of the defined benefit program assets and the defined contribution of the employer pension fund (DPPK) tend to be higher in equity and debt than the defined contribution assets of the Financial Institution Pension Fund (DPLK) more to deposits with fixed yields. Keywords : pension fund asset, allocation, expected return

COVID-19 The Global Pandemic: Learning & Take Out for National Pension System (NPS)

2021 ◽  
Vol 4 (i) ◽  
Keyword(s):  
New York ◽  
Pension Fund ◽  
Pension System ◽  
Stock Exchange ◽  
Stock Exchanges ◽  
Security Market ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Economic Activities ◽  
Fund Managers

The SARS Cov-2 (Covid 19) pandemic has shaken the whole world; it has brought the business, education, industry, transport, communications, travel, hospitality almost all the economic activities to a standstill. Accordingly, it has adversely affected the financial markets and stock exchanges across the globe. The stock exchanges, may it be New York Stock Exchange, Dow Jones, London Stock Exchange, Nikkei, Bombay Stock Exchange or National Stock Exchange experienced an unprecedented plunge of 40 to 50% in a period few weeks. This new dynamic of volatility possesses serious questions about the market driven National Pension System (NPS) which endeavor to ensure smooth retirement life for Indian elderly. The volatility in security market will significantly impact the fund managers’ performance and accordingly the retirement benefit of the subscriber. This article has investigated the impacts of pandemic on fund manager’s risk returns profile. We have used three industry standard risk-adjusted returns parameters such as Sharpe ratio, Treynor Ratio and Jensen’s alpha to evaluate the performance of NPS pension fund managers selected under study. The study has also explored the learning from such unexpected crisis for the policy makers for future preparedness. On the basis of finding, it has suggested some measures for long run sustainability of schemes under NPS. Keywords : NPS, PFRDA, Defined benefit, Defined contribution, Pension fund managers, Risk adjusted returns, COVID-19.

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