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

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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 only in January 2007 were 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 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.

Suggested Citation

  • W Pfau, 2009. "The Role of International Diversification in Public Pension Systems: The Case of Pakistan," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 81-106, September.
  • Handle: RePEc:eis:articl:209pfau
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    References listed on IDEAS

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    1. 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.
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    3. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-675, September.
    4. Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, vol. 110(461), pages 46-81, February.
    5. Irfan, Mohammad, 2003. "Poverty and social safety nets: a case study of Pakistan," MPRA Paper 38082, University Library of Munich, Germany.
    6. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 77-83, March.
    7. 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.
    8. Reisen, Helmut, 1997. "Liberalizing foreign investments by pension funds: Positive and normative aspects," World Development, Elsevier, vol. 25(7), pages 1173-1182, July.
    9. 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.
    10. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    11. Iglesias, Augusto & Palacios, Robert J., 2000. "Managing public pension reserves - Part I : evidence from the international experience," Social Protection and Labor Policy and Technical Notes 21311, The World Bank.
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    Cited by:

    1. 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, vol. 15(1), pages 127-151, Jan-Jun.
    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. Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.
    4. Khasanbaev, Alisher & Pfau, Wade Donald, 2009. "The Funded Pension Scheme in Uzbekistan: An Analysis," MPRA Paper 19035, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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