European pension reforms and property investments
Important changes are coming quickly to Europe's retirement savings industry. Funds are under pressure to consider investment in a portfolio context, and are giving more serious consideration to alternative investments. As new regulations and standards of best practice emerge, funds will increasingly consider broadening their exposure to alternative investments, particularly property, which compares favourably with stocks and bonds on a total potential return and return-to-risk-ratio basis. This paper shows that, based on some fairly conservative assumptions, property should perform well when compared with other asset classes.
UK pension fund management after Myners: The hunt for correlation begins
The Myners Report will have a number of significant consequences for pension fund management and performance measurement in the UK. First, it changes the way in which assets are selected. The strategic asset allocation will have overriding importance in pension fund management. Asset classes will be selected on the basis of their match with liabilities in terms of correlation and volatility, rather than on the basis of expected return. Every pension scheme will have a scheme-specific funding standard that reflects the maturity structure of the liabilities of the scheme. Secondly, it changes the role of the fund manager. A hierarchical relationship will develop between the investment adviser, actuary and fund manager. The investment advisory function assumes a primacy over the actuarial and fund management functions. Thirdly, it changes the way investment performance is measured. Liability-driven performance measurement and attribution will replace the existing performance measurement framework in the UK. The passively managed components of the pension fund will be judged on the costs of implementation. Only the performance of the surplus assets will be measured on a conventional basis. The Myners Report is summarised and an illustrative statement of investment principles and transparency statement are presented.
Pension schemes as options on pension fund assets: implications for pension fund management
Abstract This paper shows that the three principal types of funded pension scheme (defined benefit, defined contribution and targeted money purchase) are related through a set of options on the underlying financial assets held in the fund. The value of these options depends on both contribution inflows and the financial asset allocation chosen by the fund manager. The option values can therefore be used to assess both the appropriateness of the funding level and the effectiveness of the asset allocation in achieving the objectives of asset-liability management. In particular, they can be used to determine the probability of scheme insolvency.