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The Role of International Diversification in Public Pension Systems: The Case of Pakistan

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  • Pfau, Wade Donald

Abstract

Pakistan’s pension system is in the process of increasing funding in anticipation of providing for a growing elderly population. The pension assets are mainly invested domestically, as it was just in January 2007 that regulations changed to allow the purchase of international assets. In this paper, we quantify how diversification of the pension funds to include world financial assets could help a great deal in improving the sustainability of Pakistan pensions by simultaneously increasing expected returns and decreasing volatility. These arguments are made using historical data, and the robustness of our findings is demonstrated using a large variety of alternative assumptions about future asset returns, risks, and correlations. We find that international diversification could dramatically help to create sustainability for Pakistan’s main public pension system available to private workers.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19037.

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Date of creation: Sep 2009
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Publication status: Published in Economic Issues 2.14(2009): pp. 81-105
Handle: RePEc:pra:mprapa:19037

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Keywords: pension; asset allocation; financial markets; Asia; Pakistan;

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  1. Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(461), pages F46-81, February.
  2. Iglesias, Augusto & Palacios, Robert J., 2000. "Managing public pension reserves - Part I : evidence from the international experience," Social Protection Discussion Papers 21311, The World Bank.
  3. Mohammad Irfan, 2003. "Poverty and Social Safety Nets: A Case Study of Pakistan," MIMAP Technical Paper Series, Pakistan Institute of Development Economics 2003:15, Pakistan Institute of Development Economics.
  4. Gary Burtless, 2007. "International Investment for Retirement Savers: Historical Evidence on Risk and Returns," Working Papers, Center for Retirement Research at Boston College wp2007-05, Center for Retirement Research, revised Feb 2007.
  5. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 1(01), pages 77-83, March.
  6. Reisen, Helmut, 1997. "Liberalizing foreign investments by pension funds: Positive and normative aspects," World Development, Elsevier, Elsevier, vol. 25(7), pages 1173-1182, July.
  7. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  8. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, American Economic Association, vol. 60(4), pages 668-75, September.
  9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
  10. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  11. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, August.
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Cited by:
  1. Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.
  2. Rehman, Fahd, 2010. "Asset Allocation for Government Pension Funds in Pakistan:A Case for International Diversification," MPRA Paper 25060, University Library of Munich, Germany.
  3. Khasanbaev, Alisher & Pfau, Wade Donald, 2009. "The Funded Pension Scheme in Uzbekistan: An Analysis," MPRA Paper 19035, University Library of Munich, Germany.
  4. Fahad Rehman, 2010. "Asset Allocation for Government Pension Funds in Pakistan: A Case for International Diversification," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 127-151, Jan-Jun.

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