Role of the Pension Protection Fund in financial risk management of UK defined benefit pension sector: a multi-period economic capital study

Yang, Wei and Tapadar, Pradip (2015) Role of the Pension Protection Fund in financial risk management of UK defined benefit pension sector: a multi-period economic capital study. Annals of Actuarial Science, 9 (1). pp. 134-166. ISSN 1748-4995. (doi:https://doi.org/10.1017/S1748499514000256) (Full text available)

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Abstract

With the advent of formal regulatory requirements for rigorous risk-based, or economic, capital quantification for the financial risk management of banking and insurance sectors, regulators and policy-makers are turning their attention to the pension sector, the other integral player in the financial markets. In this paper, we analyse the impact of applying economic capital techniques to defined benefit pension schemes in the United Kingdom. We propose two alternative economic capital quantification approaches, first, for individual defined benefit pension schemes on a stand-alone basis and then for the pension sector as a whole by quantifying economic capital of the UK’s Pension Protection Fund, which takes over eligible schemes with deficit, in the event of sponsor insolvency. We find that economic capital requirements for individual schemes are significantly high. However, we show that sharing risks through the Pension Protection Fund reduces the aggregate economic capital requirement of the entire sector.

Item Type: Article
Uncontrolled keywords: Pension Protection Fund; Defined benefit pension scheme; Economic capital; Solvency; Financial risk management
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: Pradip Tapadar
Date Deposited: 18 Feb 2015 16:43 UTC
Last Modified: 13 May 2015 10:24 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/47017 (The current URI for this page, for reference purposes)
Tapadar, Pradip: https://orcid.org/0000-0003-0435-0860
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