Mathematical model of performance measurement of defined contribution pension funds

>Magister Scientiae - MScThe industry of pension funds has become one of the drivers of today’s economic activity by its important volume of contribution in the financial market and by creating wealth. The increasing importance that pension funds have acquired in today’s economy and financial market, raises special attention from investors, financial actors and pundits in the sector. Regarding this economic weight of pension funds, a thorough analysis of the performance of different pension funds plans in order to optimise benefits need to be undertaken. The research explores criteria and invariants that make it possible to compare the performance of different pension fund products. Pension fund companies currently do measure their performances with those of others. Likewise, the individual investing in a pension plan compares different products available in the market. There exist different ways of measuring the performance of a pension fund according to their different schemes. Generally, there exist two main pension funds plans. The defined benefit (DB) pension funds plan which is mostly preferred by pension members due to his ability to hold the risk to the pension fund manager. The defined contributions (DC) pension fund plan on the other hand, is more popularly preferred by the pension fund managers due to its ability to transfer the risk to the pension fund members. One of the reasons that motivate pension fund members’ choices of entering into a certain programme is that their expectations of maintaining their living lifestyle after retirement are met by the pension fund strategies. This dissertation investigates the various properties and characteristics of the defined contribution pension fund plan with a minimum guarantee and benchmark in order to mitigate the risk that pension fund members are subject to. For the pension fund manager the aim is to find the optimal asset allocation strategy which optimises its retribution which is in fact a part of the surplus (the difference between the pension fund value and the guarantee) (2004) [19] and to analyse the effect of sharing between the contributor and the pension fund. From the pension fund members’ perspective it is to define a optimal guarantee as a solution to the contributor’s optimisation programme. In particular, we consider a case of a pension fund company which invests in a bond, stocks and a money market account. The uncertainty in the financial market is driven by Brownian motions. Numerical simulations were performed to compare the different models

The Rationale for Fundamental Pension Reform in Germany and the United States: An Assessment

This paper considers the arguments for fundamental pension reform in Germany and the United States. The two countries have recently made or are considering reforms that would reduce the generosity of the traditional, pay-as-you-go pension system. Some or all of the lost benefits would be replaced by pensions from newly created individual, defined-benefit, retirement accounts. The paper addresses three questions that are relevant for assessing fundamental reform: (1) Should the pension system move toward advance funding of future benefit obligations? (2) What financial assets should be accumulated to back future pension promises? (3) Should the existing system be reformed to include individual retirement accounts?

Impact at Scale: Policy Innovation for Institutional Investment With Social and Environmental Benefit

Explores policy options to maximize impact investing opportunities for institutional investors and accelerate the development of impact investing practices and products. Presents case studies of and insights from investors and service providers

Money-back guarantees in individual pension accounts : evidence from the German pension reform

The German Retirement Saving Act instituted a new funded system of supplementary pensions coupled with a general reduction in the level of state pay-as-you-go old-age pensions. In order to qualify for tax relief, the providers of supplementary savings products must offer a guarantee of the nominal value at retirement of contributions paid into these saving accounts. This paper explores how this "money-back" guarantee works and evaluates alternative designs for guarantee structures, including a life cycle model (dynamic asset allocation), a plan with a pre-specified blend of equity and bond investments (static asset allocation), and some type of portfolio insurance. We use a simulation methodology to compare hedging effectiveness and hedging costs associated with the provision of the money-back guarantee. In addition, the guarantee has important implications for regulators who must find an appropriate solvency system for such saving schemes. This version June 17, 2002 . Klassifikation: G11, G23, G2

From Ideas to Practice, Pilots to Strategy: Practical Solutions and Actionable Insights on How to Do Impact Investing

This report is the second publication in the World Economic Forum's Mainstreaming Impact Investing Initiative. The report takes a deeper look at why and how asset owners began to include impact investing in their portfolios and continue to do so today, and how they overcame operational and cultural constraints affecting capital flow. Given that impact investing expertise is spread among dozens if not hundreds of practitioners and academics, the report is a curation of some -- but certainly not all -- of those leading voices. The 15 articles are meant to provide investors, intermediaries and policy-makers with actionable insights on how to incorporate impact investing into their work.The report's goals are to show how mainstream investors and intermediaries have overcome the challenges in the impact investment sector, and to democratize the insights and expertise for anyone and everyone interested in the field. Divided into four main sections, the report contains lessons learned from practitioner's experience, and showcases best practices, organizational structures and innovative instruments that asset owners, asset managers, financial institutions and impact investors have successfully implemented

Upgrading the investment policy framework of public pension funds

Public pension funds have the potential to benefit from low operating costs because they enjoy economies of scale and avoid large marketing costs. But this important advantage has in most countries been dissipated by poor investment performance. The latter has been attributed to a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability. Recent years have witnessed the creation of new public pension funds in several countries, and the modernization of existing ones in others, with special emphasis placed on upgrading their investment policy framework and strengthening their governance structure. This paper focuses on the experience of four new public pension funds that have been created in Norway, Canada, Ireland and New Zealand. The paper discusses the safeguards that have been introduced to ensure their independence and their insulation from political pressures. It also reviews their performance and their evolving investment strategies. All four funds started with the romantic idea of operating as'managers of managers'and focusing on external passive management but their strategies have progressively evolved to embrace internal active management and significant investments in alternative asset classes. The paper draws lessons for other countries that wish to modernize their public pension funds.Debt Markets,,Emerging Markets,Investment and Investment Climate,Non Bank Financial Institutions

Grouping Individual Investment Preferences in Retirement Savings: A Cluster Analysis of a USS Members Risk Attitude Survey

Cluster analysis is used to identify homogeneous groups of members of USS in terms of risk attitudes. There are two distinct clusters of members in their 40s and 50s. One had previously ‘engaged’ with USS by making additional voluntary contributions. It typically had higher pay, longer tenure, less interest in ethical investing, lower risk capacity, a higher percentage of males, and a higher percentage of academics than members of the ‘disengaged’ cluster. Conditioning only on the attitude to risk responses, there are 18 clusters, with similar but not identical membership, depending on which clustering method is used. The differences in risk aversion across the 18 clusters could be explained largely by differences in the percentage of females and the percentage of couples. Risk aversion increases as the percentage of females in the cluster increases, while it reduces as the percentage of couples increases because of greater risk sharing within the household. Characteristics that other studies have found important determinants of risk attitudes, such as age, income and (pension) wealth, do not turn out to be as significant for USS members. Further, despite being on average more highly educated than the general population, USS members are marginally more risk averse than the general population, controlling for salary, although the difference is not significant

Ethical investment in superannuation funds; Can it occur without breaching traditional trust principles?

Ethical investing in commercial activities is a topic which has received considerable attention of late. This has occurred in the areas of company law at all levels, with the concerns of consumers in relation to the production of products, and also in trust law, in particular superannuation trusts. Superannuation Trusts are of particular significance as they have become significant institutional investors in a number of substantial commercial activities. Ethical investment which requires the trustees to take account of issues other than financial when investing is seen to run counter to traditional trust law principles. Relevant issues relating to ethical investing include: human rights and labour concerns, environmental and moral issues such as investing in the alcohol and tobacco industries. This paper focusing upon superannuation law in the Australian and New Zealand jurisdictions considers the investment obligations of trustees in superannuation trusts. Such obligations closely resemble what may be referred to as traditional or core obligations of trustees. It acknowledges that difficulties arise when attempting to include ethical considerations in investment decisions with trust property. Having acknowledged this, the paper in upholding the place of ethical investing in the current environment proceeds to outline a means by which ethical investing can be adopted without compromising the position of trustees in any manner and which still focuses upon the best financial interests of the beneficiaries

Upgrading investment regulations in second pillar pension systems : a proposal for Colombia

The passivity of the demand for pension products is one of the striking features of mandatory pension systems. Consequently, the provision of multiple investment alternatives to households (multifund schemes) does not ensure that contributions are invested efficiently. In addition, despite the theoretical findings that short term return maximization is not conductive to long-term return maximization, the regulatory framework of pension fund management companies puts excessive emphasis on short-term maximization. Therefore, it is not obvious that typical regulatory framework of pension funds is conductive to optimal pensions. By establishing a set of default options on investment portfolios, this paper proposes a mechanism to align the incentives of the pension fund management companies with the long-term objectives of the contributors. The paper provides a methodology, which is subsequently applied to Colombia.Debt Markets,Emerging Markets,Financial Literacy,Mutual Funds,Investment and Investment Climate

Are Canadian pension plans disadvantaged by the current structure of portfolio regulation?

We investigate the performance of Canadian pension funds relative to those from the UK and US, in the light of the ongoing quantitative asset restrictions that still apply in Canada, compared with the purer prudent person approach in the UK and US. We find that although Canadian funds often obtain better combinations of return and risk, returns are often less than could be obtained given financial market conditions, as shown by dummy portfolios split evenly between bonds and equities, or diversified into real estate, as well as mean-variance optimal portfolios. In contrast, UK and US funds typically outperform such benchmarks. Combined with criticisms of specific Canadian regulations in the light of finance theory and empirical evidence, the paper makes a case for removal of residual quantitative restrictions in Canada, and their replacement by sole prudent person regulations