Cointegration and the Relationship Between Pension Liabilities and Asset Prices

Cardinale, Mirko

doi:10.2139/ssrn.892771

Cited by 8 publications

(10 citation statements)

References 46 publications

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“…Timeseries, all which achieve stationarity after differentiating, can have linear combinations which are stationary in levels. Cardinale (2003) investigates the relationship between pension liabilities and asset prices. With data from the UK, he finds that while short-run correlation evidence is less consistent, there is a consistent long-run link.…”

Section: Cointegrationmentioning

confidence: 99%

“…In this section I will describe a model describing the relationship; pension liabilities and asset prices. The model builds on Cardinale (2003). Furthermore I will do a cointegration analysis similar to Cardinale (2003), but on data relevant for Norway.…”

Section: Cointegrationmentioning

confidence: 99%

“…Furthermore I will do a cointegration analysis similar to Cardinale (2003), but on data relevant for Norway. Cardinale (2003) assumes that the level of accrued pension liability, PL, is proportional to the current level of the real wage, Y, times an appropriate bond, B:…”

Section: Cointegrationmentioning

confidence: 99%

“…Similarly, Benzoni et al (2006) explore the implications of a cointegrated relationship between an investor's non-tradable human capital and financial assets. Cardinale (2003) looks for and finds a cointegrated relationship between financial assets and wages.…”

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confidence: 99%

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Strategic asset allocation for a country: the Norwegian case

Døskeland

2007

Fin Mkts Portfolio Mgmt

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This paper develops a simple strategic asset allocation model for a country with non-tradable assets and liabilities. Contemporaneous correlation does not capture the long-term relationship between the non-tradable items and the financial assets. I apply cointegration and duration matching to better identify the long-term relationship. The model is applied to the case of Norway. Simulations suggest that Norway should implement a strategy which entails a higher proportion (than today’s strategy) invested in stocks. Although the new strategy is superior in several criteria and as Norway reforms its social security system, there is still considerable risk that Norway will fail to meet its liabilities. Copyright Swiss Society for Financial Market Research 2007Strategic asset allocation, Social security system, Public pensions, G11, H55,

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Section: Cointegrationmentioning

confidence: 99%

Section: Cointegrationmentioning

confidence: 99%

Section: Cointegrationmentioning

confidence: 99%

mentioning

confidence: 99%

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Strategic asset allocation for a country: the Norwegian case

Døskeland

2007

Fin Mkts Portfolio Mgmt

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“…Cardinale (2003) also concludes that the matching portfolio for salarylinked liabilities is a composite hedge of bonds, index linked gilts, domestic and foreign equities and property.…”

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confidence: 93%

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

Sutcliffe¹

2005

Journal of Pension Economics and Finance

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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. 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 of the trustees and employer.Key words: pension funds, asset allocation, cult of the equity, time diversification, mean reversion, liability matching, equity risk premium. Throughout this paper, except where specified otherwise, equities is taken to mean a well diversified portfolio of shares, e.g. the market portfolio. 2Taxation is irrelevant for public sector pension schemes, while default insurance has not applied in the UK. Risk sharing may mean that the employees and the employer have different 1The allocation of a pension fund between equities and other asset classes is a key decision for trustees (Blake, Lehmann and Timmermann, 1999;Brinson, Hood and Beebower, 1986;Brinson, Singer and Beebower, 1991;and Ibbotson and Kaplan, 2000). The Boots Pension Scheme announced in July 2001 that they had liquidated the 75% of their assets invested in equities, and moved to a 100% bond portfolio, Ralfe (2001Ralfe ( , 2002, Ralfe, Speed and Palin (2003). This constitutes a clear rejection by Boots of the cult of the equity 1 ; which may be defined as investing a large proportion of the assets of a long term investor (e.g. a pension fund or a life assurance company) in equities. This paper shows how the cult has become established in the UK, and examines the arguments for its continuation.The total deficit of private sector UK defined benefit pension schemes was estimated in July 2003 by the Confederation of British Industry (2003) at £160 billion (although they note it might have been as high as £300 billion). The CBI also estimated that company profits would be depressed by about £16 billion per year over the next decade because of the need to increase employer pension contributions to fill this pensions deficit. A major cause of this deficit is the cult of the equity. Over the period January 2000 to March 2003, the FTSE All Share index fell to less than half its initial value. The UK cult of the equity meant that pension scheme losses from this stock market fall were much larger than would otherwise have been the case. These equity losses were an important factor in pension schemes reporting large deficits, closing to new members and increasing their co...

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Portfolio allocation for public pension funds

Pennacchi¹,

Rastad²

2011

Journal of Pension Economics and Finance

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This paper presents a model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000-2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset -liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

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Cointegration and the Relationship Between Pension Liabilities and Asset Prices

Cited by 8 publications

References 46 publications

Strategic asset allocation for a country: the Norwegian case

Strategic asset allocation for a country: the Norwegian case

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

Portfolio allocation for public pension funds

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