Optimal investment policies for defined benefit pension funds
AbstractThis paper analyzes optimal investment policies for pension funds of a defined benefit (DB) type. The nature of a DB fund induces a natural modeling of preferences being of the mean-downside risk type. With compensation for inflation as an explicit goal of a pension fund, a natural reference point for the risk measure is the future (indexed) value of the liabilities. Results are presented for different levels of inflation uncertainty and its correlation with stock returns. The optimal decision rules show increased risk-taking for funding ratios moving away from the discounted value of the reference point. Furthermore, it is shown that the outcomes are comparable with those using a mean-downside deviation criterion. We provide intuition for the results and compare the outcomes with actual investment policies of six large Dutch pension funds.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.
Volume (Year): 6 (2007)
Issue (Month): 01 (March)
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Other versions of this item:
- A.H. Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," WO Research Memoranda (discontinued) 728, Netherlands Central Bank, Research Department.
- Arjen Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," DNB Staff Reports (discontinued) 112, Netherlands Central Bank.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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