29 research outputs found
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Optimal portfolio and spending rules for endowment funds
We investigate the role of different spending rules in a dynamic asset allocation model for university endowment funds. In particular, we consider the fixed consumption-wealth ratio (CW) rule and the hybrid rule which smoothes spending over time. We derive the optimal portfolios under these two strategies and compare them with a theoretically optimal (Merton) strategy. We show that the optimal portfolio with habit is less risky compared to the optimal portfolio without habit. A calibrated numerical analysis on U.S. data shows, similarly, that the optimal portfolio under the hybrid strategy is less risky than the optimal portfolios under both the CW and the classical Merton strategies, in typical market conditions. Our numerical analysis also shows that spending under the hybrid strategy is less volatile than the other strategies. Thus, endowments following the hybrid spending rule use asset allocation to protect spending. However, in terms of the endowment’s wealth, the hybrid strategy comparatively outperforms the conventional Merton and CW strategies when the market is highly volatile but under-performs them when there is strong stock market growth and low volatility. Overall, the hybrid strategy is effective in terms of stability of spending and intergenerational equity because, even if it allows short-term fluctuation in spending, it ensures greater
stability in the long run
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Pension plan asset valuation
Various asset valuation methods are used in the context of funding valuations. The motivation for such methods and their properties are briefly described. Some smoothed value or market-related methods based on arithmetic averaging and exponential smoothing are considered and their effect on funding is discussed. Suggestions for further research are also made
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Efficient amortization of Actuarial gains/losses and optimal funding in pension plans
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Efficient Gain and Loss Amortization and Optimal Funding in Pension Plans
The authors consider efficient methods of amortizing actuarial gains and losses in defined-benefit pension plans. In the context of a simple model where asset gains and losses emerge as a consequence of random (independent and identically distributed) rates of investment return, it has been shown that direct amortization of such gains and losses leads to more variable funding levels and contribution rates, compared with an indirect and proportional form of amortization that “spreads” the gains and losses. Stochastic simulations are performed and they indicate that spreading remains more efficient than amortization with simple AR(1) and MA(1) rates of return. Similar results are obtained when a more comprehensive actuarial stochastic investment model (which includes economic wage inflation) is simulated. Proportional spreading is rationalized as the contribution control that optimizes mean square deviations in the contributions and fund levels when the funding process is Markovian and the fund is invested in two assets (a random risky and a risk-free asset). Efficient spreading and amortization periods are suggested for the United States, the United Kingdom, and Canada
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The treatment of assets in pension funding
A recent survey of actuarial practitioners in North America shows that smoothed-market actuarial asset values are commonly used in funding valuations of defined benefit pension plans. Four methods of calculating such values are reported in the actuarial literature but only qualitative descriptions of the methods are given. This paper provides mathematical descriptions of the “average of market”, “weighted average”, “deferred recognition” and “write-up” actuarial values. They are shown to be based on either arithmetic or exponential smoothing. Provided the same form of smoothing is used, the four methods are equivalent
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Exponential smoothing methods in pension funding
'Smoothed-market' methods are used by actuaries, when they value pension plan assets, in order to dampen the volatility in contribution rates recommended to plan sponsors. A method involving exponential smoothing is considered. The dynamics of the pension funding process is investigated in the context of a simple model where asset gains and losses emerge as a result of random rates of investment return and where the gains and losses are spread. It is shown that smoothing market values up to a point does improve the stability of contributions but excessive smoothing is inefficient. It is also shown that consideration should be given to the combined effect of the asset valuation and gain and loss adjustment methods. Practical and efficient combinations of gain/loss spreading periods and asset value smoothing parameters are suggested
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Asset valuation and the dynamics of pension funding with random investment returns
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Asset valuation and amortization of asset gains and losses defined benefit pension plans
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How to get the most from your piggy bank
Dr Iqbal Owadally, a Senior Lecturer in the Faculty of Actuarial Science and Insurance at Cass, advises on effective saving and investing