Pension Fund Risk Management: Financial and Actuarial Modeling

743 Pages·2009·5.96 MB·English

by  Marco Micocci

CHAPMAN & HALL/CRC FINANCE SERIES
Pension Fund
Risk
Management
Financial and Actuarial Modeling
Edited by
Marco Micocci
Greg N. Gregoriou
Giovanni Batista Masala
© 2010 by Taylor and Francis Group, LLC

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Library of Congress Cataloging-in-Publication Data
Pension fund risk management : financial and actuarial modeling / editors, Marco
Micocci, Greg N. Gregoriou, and Giovanni Batista Masala.
p. cm. -- (Chapman & hall/crc finance series ; 5)
Includes bibliographical references and index.
ISBN-13: 978-1-4398-1752-0 (alk. paper)
ISBN-10: 1-4398-1752-9 (alk. paper)
1. Pension trusts. 2. Risk management. I. Micocci, Marco. II. Gregoriou, Greg N.,
1956- III. Masala, Giovanni Batista. IV. Title. V. Series.
HD7105.4.P464 2010
658.3’253--dc22 2009030223
Visit the Taylor & Francis Web site at
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© 2010 by Taylor and Francis Group, LLC

Contents
Preface, ix
Editors, xvii
Contributor Bios, xix
Contributors, xxxiii
PART I Financial Risk Management
CHAPTER 1 ◾ Quantifying Investment Risk in Pension Funds 003
SHANE FRANCIS WHELAN
CHAPTER 2 ◾ Investment Decision in Defi ned Contribution
Pension Schemes Incorporating Incentive
Mechanism 039
BILL SHIH-CHIEH CHANG AND EVAN YA-WEN HWANG
CHAPTER 3 ◾ Performance and Risk Measurement
for Pension Funds 071
AUKE PLANTINGA
CHAPTER 4 ◾ Pension Funds under Inflation Risk 085
AIHUA ZHANG
v
© 2010 by Taylor and Francis Group, LLC
vi ◾ Contents
CHAPTER 5 ◾ Mean–Variance Management in Stochastic
Aggregated Pension Funds with Nonconstant
Interest Rate 103
RICARDO JOSA FOMBELLIDA
CHAPTER 6 ◾ Dynamic Asset and Liability Management 129
RICARDO MATOS CHAIM
CHAPTER 7 ◾ Pension Fund Asset Allocation under
Uncertainty 157
WILMA DE GROOT AND LAURENS SWINKELS
CHAPTER 8 ◾ Different Stakeholders’ Risks
in DB Pension Funds 167
THEO KOCKEN AND ANNE DE KREUK
CHAPTER 9 ◾ Financial Risk in Pension Funds: Application
of Value at Risk Methodology 185
MARCIN FEDOR
CHAPTER 10 ◾ Pension Scheme Asset Allocation with
Taxation Arbitrage, Risk Sharing, and Default
Insurance 211
CHARLES SUTCLIFFE
PART II Technical Risk Management
CHAPTER 11 ◾ Longevity Risk and Private Pensions 237
PABLO ANTOLIN
CHAPTER 12 ◾ Actuarial Funding of Dismissal and
Resignation Risks 267
WERNER HÜRLIMANN
© 2010 by Taylor and Francis Group, LLC
Contents ◾ vii
CHAPTER 13 ◾ Retirement Decision: Current Infl uences
on the Timing of Retirement among Older
Workers 287
GAOBO PANG, MARK J. WARSHAWSKY, AND BEN WEITZER
CHAPTER 14 ◾ Insuring Defi ned Benefi t Plans in Germany 315
FERDINAND MAGER AND CHRISTIAN SCHMIEDER
CHAPTER 15 ◾ The Securitization of Longevity Risk
in Pension Schemes: The Case of Italy 331
SUSANNA LEVANTESI, MASSIMILIANO MENZIETTI, AND TIZIANA TORRI
PART III Regulation and Solvency Topics
CHAPTER 16 ◾ Corporate Risk Management and Pension
Asset Allocation 365
YONG LI
CHAPTER 17 ◾ Competition among Pressure Groups over
the Determination of U.K. Pension Fund
Accounting Rules 389
PAUL JOHN MARCEL KLUMPES AND STUART MANSON
CHAPTER 18 ◾ Improving the Equity, Transparency, and
Solvency of Pay-as-You-Go Pension Systems:
NDCs, the AB, and ABMs 419
CARLOS VIDAL-MELIÁ, MARÍA DEL CARMEN BOADO-PENAS,
AND OLE SETTERGREN
CHAPTER 19 ◾ Risk-Based Supervision of Pension Funds
in the Netherlands 473
DIRK BROEDERS AND MARC PRÖPPER
© 2010 by Taylor and Francis Group, LLC
viii ◾ Contents
CHAPTER 20 ◾ Policy Considerations for Hedging Risks in
Mandatory Defi ned Contribution Pensions
through Better Default Options 509
GREGORIO IMPAVIDO
CHAPTER 21 ◾ Pension Risk and Household Saving over
the Life Cycle 549
DAVID A. LOVE AND PAUL A. SMITH
PART IV International Experience in Pension Fund Risk
Management
CHAPTER 22 ◾ Public and Private DC Pension Schemes,
Termination Indemnities, and Optimal
Funding of Pension System in Italy 581
MARCO MICOCCI, GIOVANNI B. MASALA, AND GIUSEPPINA CANNAS
CHAPTER 23 ◾ Effi ciency Analysis in the Spanish Pension
Funds Industry: A Frontier Approach 597
CARMEN-PILAR MARTÍ-BALLESTER AND DIEGO PRIOR-JIMÉNEZ
CHAPTER 24 ◾ Pension Funds under Investment Constraints:
An Assessment of the Opportunity Cost
to the Greek Social Security System 637
NIKOLAOS T. MILONAS, GEORGE A. PAPACHRISTOU,
AND THEODORE A. ROUPAS
CHAPTER 25 ◾ Pension Fund Defi cits and Stock Market
Effi ciency: Evidence from the
United Kingdom 659
WEIXI LIU AND IAN TONKS
CHAPTER 26 ◾ Return-Based Style Analysis Applied
to Spanish Balanced Pension Plans 689
LAURA ANDREU, CRISTINA ORTIZ, JOSÉ LUIS SARTO, AND LUIS VICENTE
INDEX, 707
© 2010 by Taylor and Francis Group, LLC
Preface
INTEGRATED RISK MANAGEMENT
IN PENSION FUNDS
Marco Micocci, Greg N. Gregoriou,
and Giovanni B. Masala
Th e world of pension funds is facing a period of extreme changes. Countries
around the world have experienced unexpected increases in life expec-
tancy and fertility rates, changing accounting rules, contribution reduc-
tions, low fi nancial returns, and abnormal volatility of markets. All these
elements have led to a fall in funded systems and to an increase in the
dependency ratios in many countries. U.K. and U.S. pension funds, which
have traditionally had relatively high equity allocations, have been hit
hard. Many public pay-as-you-go (PAYGO) systems in Europe are reduc-
ing their “generosity” with new calculation rules pointing toward the
reduction of the substitution ratios of workers. Europe is moving toward a
risk-based approach also for the regulation and the control of the techni-
cal risk of funded pension schemes.
Risk management is becoming highly complex both in public pension
funds and in private pension plans, requiring the expertise of diff erent spe-
cialists who are not frequently disposable in the professional market. Th e
world is quite rich with skilled investment managers but their comprehen-
sion of the demographic and of the actuarial face of pension risk is oft en
inadequate. On the other hand, you have many specialized actuaries who
are able to perform very sophisticated calculations and forecasts of pension
liabilities but who are not able to fully understand the coexistence (or inte-
gration) of fi nancial and actuarial risks. Also, the international accounting
standards introduce new actuarial and fi nancial elements in the balance
sheet of the fi rms that may aff ect the corporate dividend and its investment
ix
© 2010 by Taylor and Francis Group, LLC