Causes of defined benefit pension scheme funding ratio volatility and average contribution rates

2011 ◽  
Vol 6 (1) ◽  
pp. 76-102 ◽  
Author(s):  
Adam Butt
Keyword(s):  
Asset Allocation ◽  
Demographic Factors ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Equity Investment ◽  
Investment Returns ◽  
Typical Scheme ◽  
Mortality Improvement ◽  
The Impact ◽  
Average Contribution

AbstractSimulations of a model pension scheme are run with stochastic economic and demographic factors, with an aim to investigate the impact of these factors on movements in funding ratio and average contribution rates. These impacts are analysed by running regressions of movements in funding ratio and average contribution rates against the economic and demographic factors. It is found that, for a typical scheme closed to new entrants and a balanced asset allocation including equity investment, the mismatch between discount rate movements and investment returns is by far the biggest predictor of funding ratio movements, with average contribution rates affected more by events in a few individual years rather than averaged over an entire simulation. Where the scheme invests to cash-flow match liabilities, mortality improvement becomes the most significant predictor of funding ratio movements, although mortality improvement still has little impact on average contribution rates.

scholarly journals The cult of the equity for pension funds: should it get the boot?

2005 ◽  
Vol 4 (1) ◽  
pp. 57-85 ◽  
Author(s):  
CHARLES SUTCLIFFE
Keyword(s):  
Asset Allocation ◽  
Risk Sharing ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Turn Of The Millennium ◽  
Equity Prices ◽  
Risk Return ◽  
History Of ◽  
Complete Rejection ◽  
The Uk

Over the last half century UK defined benefit pension schemes have followed the cult of the equity by investing a large proportion of their assets in equities. However, since the turn of the millennium this cult has faced two serious challenges – the halving of equity prices, and the complete rejection of equity investment by the Boots pension scheme in 2001. This paper summarises the history of the cult in the UK and the arguments advanced at the time to support its adoption. It then presents the case for the cult (excluding taxation, risk sharing and default insurance). This is followed by a detailed consideration of the validity of this case, including an examination of the relevant empirical evidence. It is concluded that, in the absence of taxation, risk sharing and default insurance, the asset allocation is indeterminate; and depends on the risk-return preferences adopted by the trustees.

scholarly journals The missing link: economic exposure and pension plan risk

2015 ◽  
Vol 9 (2) ◽  
pp. 290-303
Author(s):  
Paul Sweeting ◽  
Alexandre Christie ◽  
Edward Gladwyn
Keyword(s):  
Asset Allocation ◽  
Pension Plan ◽  
Asset Returns ◽  
Oil Price ◽  
Defined Benefit ◽  
Financial Health ◽  
Defined Benefit Pension Plan ◽  
Asset Class ◽  
Normal Shape ◽  
The Impact

AbstractThe funding position of a defined benefit pension plan is often closely linked to the performance of the sponsoring company’s business. For example, a plan sponsor whose financial health is dependent on high oil prices may struggle during periods of oil price weakness. If the pension plan’s assets perform poorly at this time, the ability of the sponsor to address any funding requirement could be restricted precisely when the need for funding is heightened. In this paper, we propose an approach to dealing with joint plan and sponsor risk that can provide protection against extreme adverse events for the sponsor. In particular, adopt a strategy of minimising a portfolio’s expected losses in the event of an assumed drop of x% in the oil price. Our methodology relies on an asset allocation framework that takes into account the impact of serial correlation in asset returns, as well as the negative skewness and leptokurtosis resulting from the non-normal shape of marginal distributions of historical asset returns. We also make use of copulas to measure the dependence between asset class returns.

scholarly journals A note on Gollier's model for a collective pension scheme

2020 ◽  
pp. 1-25
Author(s):  
Johannes M. Schumacher
Keyword(s):  
Risk Sharing ◽  
Infinite Horizon ◽  
Effective Rate ◽  
Pension Scheme ◽  
Black Scholes ◽  
Investment Returns ◽  
Relative Attractiveness ◽  
Participation Constraint ◽  
Ownership Rights ◽  
The Impact

Abstract Gollier proposed in 2008 a model for the analysis of pension schemes that is helpful to focus attention on the impact of intergenerational risk sharing and on the role of the participation constraint. He uses the model to analyze the relative attractiveness of a collective scheme with respect to schemes that may be implemented by individuals for themselves. The analysis makes use of an assumption concerning the ownership rights of investment returns realized by generations that are between career start and retirement at the time of the transition from an individual to a collective system. The present paper investigates the consequences of adopting an alternative assumption. In a calibration exercise, the increase of the effective rate of return obtained by switching from an existing ‘autarky’ scheme to an infinite-horizon ‘collective’ scheme is found to be 8 basis points, as opposed to 72 basis points as reported by Gollier. Additionally, the effects are considered of changes in the specification of agents' preferences, aiming to express the specific nature of retirement income provision in the second pillar. The Black–Scholes assumptions are used to model the economic environment, so that many results can be obtained in closed form.

scholarly journals Benchmark selection and performance

2019 ◽  
Vol 19 (4) ◽  
pp. 511-531 ◽  
Author(s):  
Dirk Broeders ◽  
Leo de Haan
Keyword(s):  
Asset Allocation ◽  
Pension Funds ◽  
Investment Risk ◽  
Cross Sectional ◽  
Security Selection ◽  
Regulatory Data ◽  
Investment Returns ◽  
And Performance ◽  
Style Preferences ◽  
The Impact

AbstractUsing regulatory data free of self-reporting bias for 2007–16, we decompose investment returns of 455 Dutch pension funds according to their key investment decisions, i.e., asset allocation, market timing and security selection. In extension to existing papers, we also assess the impact of benchmark selection. Over time, asset allocation explains 39% of the variation of returns, whereas benchmark selection, timing and selection explain 11%, 9% and 16%, respectively. Across pension funds, asset allocation explains on average only 19% of the variation in pension fund returns. Benchmark selection dominates this by explaining 33% of cross-sectional returns. We relate the choice for a specific benchmark to investment, risk and style preferences.

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.

scholarly journals Pension Funding and the Actuarial Assumption Concerning Investment Returns

2003 ◽  
Vol 33 (02) ◽  
pp. 289-312 ◽  
Author(s):  
M. Iqbal Owadally
Keyword(s):  
Discount Rate ◽  
Asset Allocation ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Return On Assets ◽  
Investment Return ◽  
Investment Returns ◽  
Pension Liabilities

An assumption concerning the long-term rate of return on assets is made by actuaries when they value defined-benefit pension plans. There is a distinction between this assumption and the discount rate used to value pension liabilities, as the value placed on liabilities does not depend on asset allocation in the pension fund. The more conservative the investment return assumption is, the larger planned initial contributions are, and the faster benefits are funded. A conservative investment return assumption, however, also leads to long-term surpluses in the plan, as is shown for two practical actuarial funding methods. Long-term deficits result from an optimistic assumption. Neither outcome is desirable as, in the long term, pension plan assets should be accumulated to meet the pension liabilities valued at a suitable discount rate. A third method is devised that avoids such persistent surpluses and deficits regardless of conservatism or optimism in the assumed investment return.

scholarly journals Dynamic Programming Approach to Pension Funding: the Case of Incomplete State Information

2002 ◽  
Vol 32 (1) ◽  
pp. 129-142 ◽  
Author(s):  
S. Haberman ◽  
Joo-Ho Sung
Keyword(s):  
Pension Scheme ◽  
Programming Approach ◽  
Occupational Pension ◽  
Defined Benefit ◽  
Contribution Rate ◽  
State Information ◽  
Dynamic Programming Approach ◽  
Stochastic Inputs ◽  
Investment Returns ◽  
Control Procedures

AbstractHaberman and Sung (1994) have presented a dynamic model for a defined benefit occupational pension scheme which considered two types of risk: the “contribution rate” and the “solvency” risk. The current paper, extends this work by deriving optimal funding control procedures for determining the contribution rate for the case of a stochastic model with incomplete state information, making use of the separation principle. The stochastic inputs modelled are the investment returns and the benefit outgo.

scholarly journals Who wins? Evaluating the impact of UK public sector pension scheme reforms

2016 ◽  
Vol 237 ◽  
pp. R38-R46 ◽  
Author(s):  
Alexander M. Danzer ◽  
Peter Dolton ◽  
Chiara Rosazza Bondibene
Keyword(s):  
Public Sector ◽  
Local Government ◽  
Civil Service ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Level Of Education ◽  
Fire Services ◽  
Pension Schemes ◽  
The Uk ◽  
The Impact

Radical changes have been implemented to pension schemes across the UK public sector from April 2015. This paper simulates how these changes will affect the lifetime pension and how the negotiated pension changes compare across six public sector schemes by level of education. Specifically, we simulate the occupation specific Defined Benefit (DB) pension wealth accumulated for a representative employee over the lifecycle by factoring in the recent changes to pension conditions. We find that less educated workers with low or moderate earnings in the NHS, Local Government and Civil Service schemes are the winners having secured an increase in the value of their pension of between 10–20 per cent. Graduate workers with faster wage growth in the Civil Service, Teachers and Local Government schemes lose between 3 per cent and 5 per cent. This is in sharp contrast with the Police and Fire services who have lost around 40 per cent irrespective of their education.

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