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

Andrews, Doug W. and Bonnar, Stephen and Curtis, Lori and Oberoi, Jaideep S and Pittea, Aniketh and Tapadar, Pradip (2020) Impact of Choice of Risk Assessment Time Horizons on Defined Benefit Pension Schemes. Working paper. TBC (Submitted) (KAR id:81154)


Years of high inflation and good investment returns during the 1970s and 1980s created the perception that defined benefit (DB) pension schemes were easily affordable. Over the past few decades however, increasing life expectancy and steady fall in interest rates have meant that pension costs have increased. This has led to the closure of many DB schemes and widespread implementation of so-called de-risking strategies, such as moving away from predominantly equity investments to bonds. We assess the importance of both asset allocation and contribution rates for the risk of a UK and a stylised US DB scheme, using both a run-off and a shorter 3-year horizon. Using the 3-year horizon, which is typically preferred by regulators, a high bond allocation does reduce 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. If the short-term risk assessment approach explains why DB schemes have been moving towards a higher bond allocation strategy, it might actually be detrimental to the long-term financial health of the schemes. Contribution rates have relatively lower impact on the risk.

Item Type: Monograph (Working paper)
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: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Pradip Tapadar
Date Deposited: 07 May 2020 18:44 UTC
Last Modified: 13 May 2020 09:16 UTC
Resource URI: (The current URI for this page, for reference purposes)
Oberoi, Jaideep S:
Tapadar, Pradip:
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