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 real or indexed value of the liabilities. Results are presented for a mean-shortfall model and different assumptions for inflation uncertainty, correlation between inflation and stock returns, and the level of the risk-free rate. Comparative statics show increased risk-taking for funding ratios moving away from the reference point. 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 InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 728.
Date of creation: 2003
Date of revision:
pension funds; optimal investment; defined benefit;
Other versions of this item:
- Siegmann, Arjen, 2007. "Optimal investment policies for defined benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(01), pages 1-20, March.
- 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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