Credit Ratings and UK Defined Pension Fund Portfolio Values
The emergence, in recent years, of large financing deficits in the portfolio values of UK DB pension funds, along with changes in the way such funds are valued by actuaries, has led fund managers to increase the weighting of fixed income securities, including corporate bonds, relative to equities in the portfolios they manage. Since bond prices tend to be less volatile than those of equities, greater bond holdings are attractive in the context of an accounting framework which now values funds on the basis of the current market values of the assets they hold and does not permit the smoothing of asset values over time. When selecting the fixed income securities to be held in the portfolios they manage, fund managers will have regard to the credit ratings assigned to corporate bond issuers. Through a consideration of some key credit rating metrics, and a survey of some relevant literature, this paper seeks to shed light on the ways, and the extent to which, the actions of the credit rating agencies may impact upon the values of defined benefit pension fund portfolios. The paper is organized as follows. Section i provides a general introduction to the theory and practice of credit rating and notes the relevance of credit ratings to defined benefit pension funds. Section ii presents a discussion of pension fund portfolios and their asset allocations. Sections iii and iv analyse the significance of credit ratings and the behaviour of rating agencies for defined benefit pension funds. Section v draws some tentative conclusions and offers some suggestions on the direction that future research on this topic might take.
|Date of creation:||Jul 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 0117 328 3610
Web page: http://www1.uwe.ac.uk/bl/research/bristoleconomics.aspx
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zvi Bodie, 1989.
"Pensions as Retirement Income Insurance,"
NBER Working Papers
2917, National Bureau of Economic Research, Inc.
- John Y. Campbell & Glen B. Taksler, 2002.
"Equity Volatility and Corporate Bond Yields,"
NBER Working Papers
8961, National Bureau of Economic Research, Inc.
- John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
- Campbell, John & Taksler, Glen, 2003. "Equity Volatility and Corporate Bond Yields," Scholarly Articles 3153307, Harvard University Department of Economics.
- Gonzalez, F. & Haas, F. & Johannes, R. & Persson, M. & Toledo, L. & Violi, R. & Zins, C. & Wieland, M., 2004.
"Market dynamics associated with credit ratings: a literature review,"
Financial Stability Review,
Banque de France, issue 4, pages 53-76, June.
- Fernando Gonzalez & François Haas & Ronald Johannes & Mattias Persson & Liliana Toledo & Roberto Violi & Martin Wieland & Carmen Zins, 2004. "Market dynamics associated with credit ratings - a literature review," Occasional Paper Series 16, European Central Bank.
- Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, vol. 110(461), pages F46-81, February.
- Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
- Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
- ., 2004. "Market dynamics associated with credit ratings: a literature review," Financial Stability Review, Banque de France, issue 4, pages 77-93, June.
- Caton, Gary L & Goh, Jeremy, 2003. " Are All Rivals Affected Equally by Bond Rating Downgrades?," Review of Quantitative Finance and Accounting, Springer, vol. 20(1), pages 49-62, January.
When requesting a correction, please mention this item's handle: RePEc:uwe:wpaper:0909. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Felix Ritchie)
If references are entirely missing, you can add them using this form.