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The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions

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  • Sjöholm, Hans-Kristian

    ()
    (Swedish School of Economics and Business Administration)

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    Abstract

    This paper examines the potential impact of new capital requirements on asset allocations of Finnish pension institutions. We describe the new requirements and consider portfolio construction to minimize regulatory capital, given the investor’s preferred level of expected return. Results identify portfolio transactions that enhance expected return without increasing capital needs. Regulation calls for portfolio diversification and prudence in management, but this paper shows that market participants can exploit inconsistencies in regulation. Possible future consequences include capital outflows from the pension system and an unintended decrease in pre-funding of old-age pensions.

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    Bibliographic Info

    Paper provided by Hanken School of Economics in its series Working Papers with number 532.

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    Length: 15 pages
    Date of creation: 07 Nov 2007
    Date of revision:
    Handle: RePEc:hhb:hanken:0532

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    Postal: Hanken School of Economics, Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
    Phone: +358-9-431 331
    Fax: +358-9-431 33 333
    Web page: http://www.hanken.fi
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    Keywords: finnish pension system; solvency; portfolio; optimization; regulatory; arbitrage;

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    1. Johansson, Edvard & Böckerman, Petri & Kiiskinen, Urpo & Heliövaara, Markku, 2007. "The Effect of Obesity on Wages and Employment: The Difference Between Having a High BMI and Being Fat," Working Papers 528, Hanken School of Economics.
    2. Böckerman, Petri & Johansson, Edvard & Jousilahti, Pekka & Uutela, Antti, 2007. "The Physical Strenuousness of Work is Slightly Associated with an Upward Trend in the Body Mass Index," Working Papers 523, Hanken School of Economics.
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