scholarly journals Pension Scheme Asset Allocation with Taxation Arbitrage, Risk Sharing and Default Insurance

2004 ◽  
Author(s):  
Charles M. Sutcliffe
Keyword(s):  
Asset Allocation ◽  
Risk Sharing ◽  
Pension Scheme ◽  
Arbitrage Risk

scholarly journals Pension Scheme Asset Allocation with Taxation Arbitrage, Risk Sharing and Default Insurance

2004 ◽  
Vol 10 (5) ◽  
pp. 1111-1131 ◽  
Author(s):  
C. M. S. Sutcliffe
Keyword(s):  
Private Sector ◽  
Asset Allocation ◽  
Risk Sharing ◽  
Pension Funds ◽  
The Other ◽  
Pension Scheme ◽  
Economic Factors ◽  
Risk Return ◽  
Pension Schemes ◽  
Arbitrage Risk

ABSTRACTThe asset allocation is a crucial decision for pension funds, and this paper analyses the economic factors which determine this choice. The analysis proceeds on the basis that, in the absence of taxation, risk sharing and default insurance, the asset allocation between equities and bonds is indeterminate and governed by the risk/return preferences of the trustees and the employer. If the employing company and its shareholders are subject to taxation, there is a tax advantage in a largely bond allocation. Risk sharing between the employer and the employees often means that one group favours a high equity allocation, while the other favours a low equity allocation. Underpriced default insurance creates an incentive for a high equity allocation. When taxation, risk sharing and underpriced default insurance are all present, it is concluded that the appropriate asset allocation varies with the circumstances of the scheme; but that a high equity allocation is probably inappropriate for many private sector pension schemes.

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.

Risk sharing, regional stabilization, and redistribution: the role of fiscal mechanisms in Switzerland

2020 ◽  
Author(s):  
Lars P Feld ◽  
Christoph A Schaltegger ◽  
Janine Studerus
Keyword(s):  
Federal Government ◽  
Risk Sharing ◽  
Panel Data Analysis ◽  
Pension Scheme ◽  
Income Differentials ◽  
Fiscal Autonomy ◽  
Long Run ◽  
Regional Stabilization ◽  
High Level ◽  
Government Transfers

Abstract This paper analyses the importance of fiscal mechanisms for regional stabilization and redistribution in Switzerland. Switzerland is particularly interesting in this context because it features both a high level of fiscal autonomy for Swiss cantons, and explicit fiscal transfers between the federal government and the cantons. Based on a panel data analysis, we study the redistributive and stabilizing properties of fiscal equalization transfers, federal government transfers in general, direct federal taxation, the unemployment insurance scheme, and the first pillar pension scheme. We find a combined redistributive effect of these mechanisms of about 20%. This means that long-run income differentials of 1 Swiss franc between cantons translate into differences of long-run disposable income after taxes and transfers of about 80 cents. The combined contemporary stabilization effect with respect to short-term income fluctuations amounts, at best, to 10%, which is a small effect compared to previous findings for other countries.

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 Political Stress and the Sustainability of Funded Pension Schemes: Introduction of a Financial Theory

2021 ◽  
Vol 14 (11) ◽  
pp. 525
Author(s):  
Ishay Wolf
Keyword(s):  
Financial Markets ◽  
Risk Sharing ◽  
Pension System ◽  
Pension Scheme ◽  
Political Pressure ◽  
Financial Position ◽  
Pension Schemes ◽  
Systemic Risks ◽  
High Earning ◽  
Entire Society

This study introduces multiplayer game in the modern pension market. Particularly, this study claims that low earners and high earners have different interests when playing in funded pension market scheme. This differentiating is enabled by avoiding the entire society as a single earning cohort. This study using financial position, demonstrates a socio-economic anomaly in the funded pension system, which is in favor of high-earning cohorts at the expense of low-earning cohorts. This anomaly is realized by a lack of insurance and exposure to financial and systemic risks. Furthermore, the anomaly could lead to a pension re-reform back to an unfunded scheme system, due mostly to political pressure. This study found that a minimum pension guarantee is a rebalance mechanism for this anomaly, which increases the probability of a sustainable pension scheme. Nowadays when countries try to balance between social expenses and awaking financial markets, one may find this theory highly relevant. It is obviously one of the cases where social targets meat financial equilibrium and here they are in the same side. Specifically, it is argued that implementing the guarantee with an intra-generational, risk-sharing mechanism is the most efficient way to reduce the effect of this abnormality.

OPTIMAL INVESTMENT FOR A DEFINED-CONTRIBUTION PENSION SCHEME UNDER A REGIME SWITCHING MODEL

2015 ◽  
Vol 45 (2) ◽  
pp. 397-419 ◽  
Author(s):  
An Chen ◽  
Łukasz Delong
Keyword(s):  
Asset Allocation ◽  
Regime Switching ◽  
Pension Plan ◽  
Optimal Investment ◽  
Investment Strategy ◽  
Switching Behavior ◽  
Pension Scheme ◽  
Defined Contribution ◽  
State Of The Economy ◽  
Plan Member

AbstractWe study an asset allocation problem for a defined-contribution (DC) pension scheme in its accumulation phase. We assume that the amount contributed to the pension fund by a pension plan member is coupled with the salary income which fluctuates randomly over time and contains both a hedgeable and non-hedgeable risk component. We consider an economy in which macroeconomic risks are existent. We assume that the economy can be in one ofIstates (regimes) and switches randomly between those states. The state of the economy affects the dynamics of the tradeable risky asset and the contribution process (the salary income of a pension plan member). To model the switching behavior of the economy we use a counting process with stochastic intensities. We find the investment strategy which maximizes the expected exponential utility of the discounted excess wealth over a target payment, e.g. a target lifetime annuity.

scholarly journals Asset Allocation for Government Pension Funds in Pakistan: A Case for International Diversification

2010 ◽  
Vol 15 (1) ◽  
pp. 127-151
Author(s):  
Fahd Rehman
Keyword(s):  
Interest Rates ◽  
Asset Allocation ◽  
International Diversification ◽  
Pension Scheme ◽  
Portfolio Performance ◽  
Potential Threat ◽  
International Investments ◽  
Pension Schemes ◽  
Short Period ◽  
Demographic Shifts

Reforms have begun in Pakistan to sustain the funded pension scheme for government-operated pension schemes such as the Employees Old Age Benefit Institution (EOBI). Presently, the EOBI operates its own fund and invests most of its assets in government-backed securities which are basically interest-bearing debt instruments. Although the returns on the EOBI’s fund have been high for a short period due to higher interest rates and minimum pension distributions, this trend is not likely to continue. Funded pension schemes depend heavily on portfolio performance because risk is transferred to contributors. Therefore, asset allocation becomes considerably important. The purpose of this study is to determine optimal asset allocation and the role of international diversification specifically for the EOBI’s funds and generally for newly created funded pension schemes in Pakistan. The article analyzes the potential benefits accrued through international investments based on historical returns over almost five decades with varying degrees of risk aversion coefficients. Varying degrees of risk may allow policymakers to incorporate their strategies for future asset behavior and take timely action to counter the potential threat of aging, demographic shifts, and liabilities and to ensure decent benefits for pensioners.

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.

OPTIMAL TIME-CONSISTENT PORTFOLIO AND CONTRIBUTION SELECTION FOR DEFINED BENEFIT PENSION SCHEMES UNDER MEAN–VARIANCE CRITERION

2014 ◽  
Vol 56 (1) ◽  
pp. 66-90 ◽  
Author(s):  
XIAOQING LIANG ◽  
LIHUA BAI ◽  
JUNYI GUO
Keyword(s):  
Risk Aversion ◽  
Asset Allocation ◽  
Optimization Problems ◽  
Realistic Model ◽  
Optimal Time ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Special Cases ◽  
Hamilton Jacobi Bellman ◽  
Mean Variance

AbstractWe investigate two mean–variance optimization problems for a single cohort of workers in an accumulation phase of a defined benefit pension scheme. Since the mortality intensity evolves as a general Markov diffusion process, the liability is random. The fund manager aims to cover this uncertain liability via controlling the asset allocation strategy and the contribution rate. In order to have a more realistic model, we study the case when the risk aversion depends dynamically on current wealth. By solving an extended Hamilton–Jacobi–Bellman system, we obtain analytical solutions for the equilibrium strategies and value function which depend on both current wealth and mortality intensity. Moreover, results for the constant risk aversion are presented as special cases of our models.

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