By How Much Can a Diversified Approach to Investing Improve the Prospects of Reducing a DB Pension Deficit?
24 Pages Posted: 6 Mar 2008
Date Written: May 2007
Following the decline in global equity markets, the rise in bond prices and the downward revisions to assumed mortality rates between 2001 and 2003, the UK's defined benefit (DB)pensions industry went from a situation where surpluses and scheme sponsor contribution holidays were commonplace, to a situation where fund deficits were the norm. This is the situation that persists today. In this paper, we present a model of a typical DB pension scheme, where we take explicit account of the linkages between both sides of the pension fund balance sheet. We use this model to assess the likely benefits of taking a more diversified approach to asset allocation compared with the traditional heavy reliance on UK equities. Our results show that there are clear gains to be had from adopting a more diversified approach to pension fund asset allocation in terms of the reduction in scheme funding volatility over time.
Keywords: Alternative asset classes, defined benefit, pension fund deficit, asset allocation
JEL Classification: G10, G11, G23
Suggested Citation: Suggested Citation