By How Much Can a Diversified Approach to Investing Improve the Prospects of Reducing a DB Pension Deficit?

24 Pages Posted: 6 Mar 2008

See all articles by Andrew Brigden

Andrew Brigden

City University London - Sir John Cass Business School

Shamik Dhar

City University London - Sir John Cass Business School

Andrew Clare

City University London - Sir John Cass Business School

Date Written: May 2007

Abstract

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

Brigden, Andrew and Dhar, Shamik and Clare, Andrew D., By How Much Can a Diversified Approach to Investing Improve the Prospects of Reducing a DB Pension Deficit? (May 2007). Available at SSRN: https://ssrn.com/abstract=1102149 or http://dx.doi.org/10.2139/ssrn.1102149

Andrew Brigden (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Shamik Dhar

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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