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Managing Investment Risk in Defined Benefit Pension Funds

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  • Dorothee Franzen

    (Oxford University)

Abstract

This paper inquires into the forces that drive the practice of risk management at defined benefit (DB) pension funds in Germany, Netherlands, United Kingdom and the United States in the aftermath of the perfect pension storm. First, pension funds‘ risk management is grounded in the context of the development of modern risk management in the financial industry more general. Second, focusing solely on single-employer sponsored DB pension funds this research critically examines the impact of recent changes in the regulatory and accounting environment for pension funds and their sponsors thereby explicitly taking into account the specific governance context in which pension funds are situated. The aim of this research is, first, to provide a better understanding of the investment risk management of DB pension funds thereby contributing to the theory of financial decision-making. Second, by conducting this analysis on a cross-country basis, this research aims at contributing to the comparative analysis of pension funds. This paper argues that the risk-taking capacity is a central element of DB pension funds. The empirical results suggest that in general risk management has become much more sophisticated but that it is often driven more by regulatory and accounting issues than by the pension fund‘s specific risk profile. Furthermore, changes to the regulatory and accounting standards increasingly impede the risk-taking capacity of DB pension funds. This research draws on in-depth interviews with market participants within the pension fund industry and their advisers. Les dispositifs de retraite à prestations définies et la gestion du risque d'investissement Le présent document analyse les ressorts de la gestion des risques telle qu’elle est pratiquée par les dispositifs de retraite à prestations définies en Allemagne, aux États-Unis, aux Pays-Bas et au Royaume-Uni au lendemain de la violente tempête qui a ébranlé le secteur des retraites. Premièrement, cette gestion des risques s’ancre dans le contexte plus général de l’élaboration d’une gestion des risques moderne par le milieu de la finance. Deuxièmement, en s’attachant exclusivement aux dispositifs à prestations définies mono-employeurs, ce document examine d’un point de vue critique les répercussions des évolutions récentes du cadre réglementaire et comptable applicable aux régimes de retraite et à leurs promoteurs, prenant ainsi explicitement en compte les mécanismes de gouvernance spécifiques de ces régimes. L’objectif de cette étude est, dans un premier temps, de mieux appréhender la gestion du risque d’investissement par les dispositifs de retraite à prestations définies, et d’étayer ainsi la théorie de la décision financière. En s’intéressant à plusieurs pays, les auteurs de ce document entendent dans un deuxième temps contribuer à l’analyse comparative des régimes de retraite. Ils font ainsi valoir que la capacité de prendre des risques est fondamentale pour les dispositifs à prestations définies. Les résultats empiriques donnent à penser que de manière générale, la gestion des risques a sensiblement gagné en complexité, mais qu’elle dépend souvent davantage de problématiques réglementaires et comptables que du profil de risque propre aux dispositifs de retraite à prestations définies. De plus, les modifications des normes réglementaires et comptables pèsent de plus en plus sur l’aptitude de ces régimes à prendre des risques. Ce document s’appuie sur des entretiens approfondis menés avec des participants au marché des retraites et leurs conseillers.

Suggested Citation

  • Dorothee Franzen, 2010. "Managing Investment Risk in Defined Benefit Pension Funds," OECD Working Papers on Insurance and Private Pensions 38, OECD Publishing.
  • Handle: RePEc:oec:dafaab:38-en
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    File URL: http://dx.doi.org/10.1787/5kmjnr3sr2f3-en
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    Cited by:

    1. Bensusan, Harry & El Karoui, Nicole & Loisel, Stéphane & Salhi, Yahia, 2016. "Partial splitting of longevity and financial risks: The longevity nominal choosing swaptions," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 61-72.

    More about this item

    Keywords

    defined benefit; dispositifs de retraite; gestion des risques; gouvernance; governance; investment; pension fund; prestation définie; regulation; réglementation;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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