Building Long-Term Portfolio Benchmarks for Pension Funds in Emerging Economies

39 Pages Posted: 10 Jan 2017  

Heinz P. Rudolph

The World Bank

Jorge Sabat

Washington University in St. Louis - John M. Olin Business School

Date Written: August 4, 2016

Abstract

The movement from a defined benefit to a defined contribution pension system has important implications in the area of portfolio allocation. While the focus of defined benefit pension funds is essentially in the long term, some defined contribution funds might have incentives to invest with shorter-term horizons. The case of open pension funds, such as the ones in several countries in Latin America and Central and Eastern European countries, shows that competition on short-term returns may bring pension funds into suboptimal portfolio strategies. As policy makers become increasingly interested in finding long-term sources of financing for infrastructure and other long-term projects, it becomes essential to upgrade the regulatory framework of open pension funds. This paper contributes to the literature by proposing an investment regulatory framework based on strategic asset allocation that can be applicable to open pension funds. Based on the use of lifecycle investment strategies, the paper proposes the implementation of common portfolio benchmarks for pension funds. Three elements are emphasized for implementation of strategic asset allocation: (a) a well-defined pension objective, (b) sound governance of the portfolio benchmark, and (c) a methodology for developing the benchmark. The paper proposes the use of the approximation methodology as a starting point for designing portfolio benchmarks, and illustrates step-by-step how to build these long-term portfolios in a didactical way.

Keywords: Non Bank Financial Institutions, Capital Flows, Social Funds and Pensions, Capital Markets and Capital Flows

Suggested Citation

Rudolph, Heinz P. and Sabat, Jorge, Building Long-Term Portfolio Benchmarks for Pension Funds in Emerging Economies (August 4, 2016). World Bank Policy Research Working Paper No. 7784. Available at SSRN: https://ssrn.com/abstract=2895510

Heinz P. Rudolph (Contact Author)

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jorge Sabat

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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