Determinants of pension funding and asset allocation decisions

ABSTRACTThe trustees and sponsors of defined benefit schemes rely on the advice of the Scheme Actuary to make important decisions concerning the funding of the scheme, the investment of its assets, and the use of surplus assets to improve benefits. These decisions have to be made in the face of considerable uncertainty about financial and demographic factors that will affect the future experience of the scheme and its success in meeting various objectives.The traditional actuarial valuation combined with actuarial judgement has played an important role in guiding decision making; but we argue that stochastic methods can add value in certain crucial areas, in particular the financial risk management of defined benefit schemes. Rather than dealing with risk by incorporating margins in the valuation basis, a stochastic approach allows the actuary to evaluate specific and quantifiable risk and performance measures for alternative funding and investment strategies.This paper recommends a framework that, when combined with a suitable stochastic model, measures the risks inherent in contribution rate and asset allocation decisions, allowing better decisions to be made. In doing this, we suggest and apply various risk and performance measures that may be thought appropriate, although our intention is to illustrate their use rather than prescribe them as objective standards. The framework provides the means to explore the trade-offs involved in possible contribution and asset allocation decisions, and points to decision strategies expected to give improved outcomes for the same level of risk. A feature of the approach that marks it out from current asset/liability techniques is that it examines the funding and investment decisions together. It does not derive a contribution rate in the traditional way, but leaves this as free variable, in the same way that the investment decision is taken to be a free variable. Another distinctive feature of our framework is that it is based on projection rather than on valuation, involving stochastic simulation of the experience of the scheme over a time horizon reflecting the concerns of the trustees and the sponsoring employer.The paper provides a case study (based on a model final salary pension scheme) showing the advantages of the framework, and goes on to explain how the results may practically be communicated to trustees and scheme sponsors.

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FACTORS AFFECTING FINANCIAL CONSUMERS’ PRIVATE PENSION PLAN DECISIONS: A LITERATURE REVIEW AND A CONCEPTUAL FRAMEWORK PROPOSAL

Business And Management Studies An International Journal ◽

10.15295/bmij.v4i2.32 ◽

2016 ◽

Vol 4 (2) ◽

Author(s):

Aslı Elif Aydın ◽

Elif Akben Selçuk

Keyword(s):

Asset Allocation ◽

Financial Literacy ◽

Pension Plan ◽

Private Pension ◽

Private Pensions ◽

Factors Affecting ◽

Private Pension Plan ◽

Saving Decisions ◽

Dispositional Factors ◽

Allocation Decisions

The objective of this study is to propose a framework related to financial consumers’ private pension plan decisions. Specifically, we review the factors affecting consumers’ participation, contribution and asset allocation decisions regarding private pensions. The factors discussed include situational and dispositional factors, personality, motivation, financial literacy, and external influences. Based on this survey of literature, we develop a number of propositions, which are expected to benefit individual retirement planners and pension institutions in gaining a better understanding of retirement saving decisions.

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Herding and Delegated Portfolio Management: The Impact of Relative Performance Evaluation on Asset Allocation

Quarterly Journal of Finance ◽

10.1142/s2010139211000092 ◽

2011 ◽

Vol 01 (02) ◽

pp. 265-292 ◽

Cited By ~ 28

Author(s):

Ernst Maug ◽

Narayan Naik

Keyword(s):

Performance Evaluation ◽

Portfolio Management ◽

Asset Allocation ◽

Relative Performance ◽

Optimal Contracts ◽

Fund Managers ◽

Portfolio Managers ◽

Delegated Portfolio Management ◽

The Impact ◽

Allocation Decisions

This paper investigates the effect of fund managers' performance evaluation on their asset allocation decisions. We derive optimal contracts for delegated portfolio management and show that they always contain relative performance elements. We then show that this biases fund managers to deviate from return-maximizing portfolio allocations and follow those of their benchmark (herding). In many cases, the trustees of the fund who employ the fund manager prefer such a policy. We also show that fund managers in some situations ignore their own superior information and "go with the flow" in order to reduce deviations from their benchmark. We conclude that incentive provisions for portfolio managers are an important factor in their asset allocation decisions.

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