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The Missing Link - Economic Exposure and Pension Plan Risk

Sweeting, Paul, Christie, Alexandre, Gladwyn, Edward (2015) The Missing Link - Economic Exposure and Pension Plan Risk. Annals of Actuarial Science, . ISSN 1748-4995.

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The funding position of a defined benefit pension plan is often closely linked to the performance of the sponsoring company's business. For example, a plan sponsor whose financial health is dependent on high oil prices may struggle during periods of oil price weakness. If the pension plan’s assets perform poorly at this time, the ability of the sponsor to address any funding requirement could be restricted precisely when the need for funding is heightened. In this paper, we propose an approach to dealing with joint plan and sponsor risk that can provide protection against extreme adverse events for the sponsor. In particular, adopt a strategy of minimising a portfolio’s expected losses in the event of an assumed drop of x% in the oil price. Our methodology relies on an asset allocation framework which takes into account the impact of serial correlation in asset returns, as well as the negative skewness and leptokurtosis resulting from the non-normal shape of marginal distributions of historical asset returns. We also make use of copulas to measure the dependence between asset class returns.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: P. Sweeting
Date Deposited: 08 Apr 2015 13:33 UTC
Last Modified: 29 May 2019 14:24 UTC
Resource URI: (The current URI for this page, for reference purposes)
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