The Cult of the Equity for Pension Funds: Should it Get the Boot?

Sutcliffe, Charles

doi:10.2139/ssrn.544862

Cited by 11 publications

(12 citation statements)

References 111 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…See Dimson et al, 2002;Cornell, 1999;and Siegel, 2002. There is also evidence that time diversification is not present for equities (Sutcliffe, 2005). (Time diversification occurs when over and under performance tends to cancel out in the long run.)…”

Section: " Introductionmentioning

confidence: 99%

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

Sutcliffe¹

2004

Br. Actuar. J.

View full text Add to dashboard Cite

The 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.

show abstract

Section: " Introductionmentioning

confidence: 99%

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

Sutcliffe¹

2004

Br. Actuar. J.

View full text Add to dashboard Cite

show abstract

“…The latter is an interesting case, because altering the asset strategy in a scheme in and of itself does not create any value (Exley et al ., 1997). This however, ignores second order effects, relating to tax, member views, trustee actions, and the value of the (shareholders) limited liability (the right of the shareholders to default on the pensions promise) (Sutcliffe, 2004, 2005).…”

Section: Capturing Risk and Uncertaintymentioning

confidence: 99%

Meeting defined benefit pension obligations: measurement, risk and flight paths

Hatchett¹,

Hurd²,

Clacher³

2012

Br. Actuar. J.

View full text Add to dashboard Cite

The UK defined benefit pension scheme landscape has changed dramatically over the last few decades. During this period of change, conflicting views regarding the measurement of both assets and liabilities has made communication challenging. This has led to an under appreciation of risk and often suboptimal decision making. This paper seeks to draw together a variety of contrasting views to provide a coherent framework for stakeholders to meet pension scheme obligations over time.The proposed framework encourages agreement between both scheme sponsors and trustees towards a common target through a well articulated plan, or "flight path". In addition, the proposed flight path structure provides a common basis underpinning the measurement of both pension obligations and the risks inherent in any plan to meet those obligations.In an alternative recent framework, the recent paper by the Discount Rate Steering Committee (2011) proposed that discount rate calculations could be broadly split between matching calculations and budgeting calculations, although in their final update (2011) they noted that "in limited circumstances, a blend of matching and budgeting can be relevant." In their final update (2011), the Discount Rate Steering Committee also published in appendix 2 a table setting out how their recommendations, including the budgeting/matching framework, corresponded to the Technical Actuarial Standards published by the Board for Actuarial Standards. This paper develops the existing research beyond discount rates. Flight pathsAs defined benefit pension schemes close to new members and to future accrual (The Pension Regulator's Purple Book 2010), the focus of sponsors and trustees tends to change.Many traditional valuation methods focused on the ongoing nature of schemes, whereas the recent trend has been towards an end game. The change in employer debt regulations on 11June 2003 together with the mass extinction of discretionary increases have also hardened the obligations reinforcing this trend. This focus on an end game is likely to give greater commonality of objectives.Once a common goal is agreed, then stakeholders can focus on the critical stage of the process, which is how they intend to get to their target, also known as a flight path. Any measurement information should support this decision making, rather than being an end in itself.One particular area of debate, which this paper addresses, is how to reconcile the views held by financial economists and those of other market analysts. This paper proposes a robust framework for allowing for investment returns above "risk free" rates.The authors note that the recent crisis has highlighted, once again, that nothing in life is risk free. However, "risk free" rates form a common building block and useful short-hand for much actuarial and financial economic analysis. We have chosen to side-step this debate in this paper. The reader may choose to interpret "risk free" in a UK context as a low credit risk instrument such as a gilt or a suitably well collateralise...

show abstract

“…Prior to the 1950s, pension funds invested proportionately little in equities, preferring debt securities. The British actuary Ross Goobey brought in the 'cult of the equity' by highlighting the case for equities, and, materially, switching the holdings of the Imperial Tobacco pension fund to equities in the 1950s (see Sutcliffe (2005) for an excellent overview). Figure 1 highlights the evolution of the average asset allocation of pension funds in the United Kingdom and the United States of America from 1970 to 2001.…”

Section: Ae Historical Evolution Of Asset Allocation Of Defined Benementioning

confidence: 99%

Defining and Measuring Investment Risk in Defined Benefit Pension Funds

Whelan¹

2007

Ann. actuar. sci.

View full text Add to dashboard Cite

A formal definition of investment risk in actuarial investigations is given. Case studies estimating the investment risk associated with different investment strategies for defined benefit pension funds using historic market data are presented. It is shown that a few decades ago, when bond markets only extended in depth to 20-year maturities, the investment risk of investing in equities was of the same order of magnitude as the investment risk introduced by the duration mismatch from investing in bonds for immature schemes. It is shown that now, with the extension of the term of bond markets and introduction of strippable bonds, the least risk portfolio for the same pension liability is a bond portfolio of suitable duration. It is argued that investment risk voluntarily undertaken in defined benefit pension plans has grown markedly in recent decades, at a time when the ability to bear the investment risk has diminished. Investment risk in pension funds is quite different to investment risk for other investors, which leads to the possibility that current portfolios are not optimised ö that is, there exist portfolios which increase the expected surplus without increasing risk. The formalising of our intuitive concept of investment risk in actuarial applications is a first step in the identification of more efficient portfolios.

show abstract

The Cult of the Equity for Pension Funds: Should it Get the Boot?

Cited by 11 publications

References 111 publications

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

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

Meeting defined benefit pension obligations: measurement, risk and flight paths

Defining and Measuring Investment Risk in Defined Benefit Pension Funds

Contact Info

Product

Resources

About