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Impact of the Choice of Risk Assessment Time Horizons on Defined Benefit Pension Schemes

Andrews, Doug W., Bonnar, Stephen, Curtis, Lori, Oberoi, Jaideep S, Pittea, Aniketh, Tapadar, Pradip (2021) Impact of the Choice of Risk Assessment Time Horizons on Defined Benefit Pension Schemes. Annals of Actuarial Science, . ISSN 1748-4995. E-ISSN 1748-5002. (doi:10.1017/S1748499521000178) (KAR id:81154)

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Official URL
https://www.doi.org/10.1017/S1748499521000178

Abstract

We examine the impact of asset allocation and contribution rates on the risk of defined benefit (DB) pension schemes, using both a run-off and a shorter 3-year time horizon. Using the 3-year horizon, which is typically preferred by regulators, a high bond allocation reduces the spread of the distribution of surplus. However, this result is reversed when examined on a run-off basis. Furthermore, under both the 3-year horizon and the run-off, the higher bond allocation reduces the median level of surplus. Pressure on the affordability of DB schemes has led to widespread implementation of so-called de-risking strategies, such as moving away from predominantly equity investments to greater bond investments. If the incentives produced by shorter term risk assessments are contributing to this shift, they might be harming the long term financial health of the schemes. Contribution rates have relatively lower impact on the risk.

Item Type: Article
DOI/Identification number: 10.1017/S1748499521000178
Uncontrolled keywords: Defined benefit pension schemes; Risk assessment; Economic capital; Time horizon; Asset allocation strategies; Contribution rates.
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics (inc Computing science)
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Divisions > Kent Business School - Division > Kent Business School (do not use)
Depositing User: Pradip Tapadar
Date Deposited: 07 May 2020 18:44 UTC
Last Modified: 09 Jun 2021 11:01 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/81154 (The current URI for this page, for reference purposes)
Oberoi, Jaideep S: https://orcid.org/0000-0002-1101-7612
Tapadar, Pradip: https://orcid.org/0000-0003-0435-0860
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