Pension Fund Risk Management: Financial and Actuarial Modeling »

As pension fund systems decrease and dependency ratios increase, risk management is becoming more complex in public and private pension plans. Pension Fund Risk Management: Financial and Actuarial Modeling sheds new light on the current state of pension fund risk management and provides new technical tools for addressing pension risk from an integrated point of view.

Divided into four parts, the book first presents the correct measurement of risk in pension funds, fund dynamics under a performance-oriented arrangement, an attribution model for monitoring the performance and risk of a defined benefit (DB) pension fund, and an optimal investment problem of a defined contribution (DC) pension fund under inflationary risk. It also describes a pension plan from a dynamic optimization viewpoint, the optimal asset allocation of U.S. pension funds, the identification of stakeholders’ risks, value-at-risk (VaR) methodology, and various effects on the asset allocation of DB pension schemes.

The second section focuses on the effects of uncertainty on employer-provided DB private pension plan liabilities; wage-based lump sum payments by death, retirement, or dismissal by the employer; fundamental retirement changes; occupational pension insurance in Germany; and longevity risk securitization in pension schemes.

In the third part, the book examines employers’ risks, accountability rules and regulations, useful actuarial analysis instruments, risk-based solvency regime in the Netherlands, and the impact of the 2008 global financial crisis on pension participants.

The final part covers DB pension freezes and terminations of plans, the two-pillar social security system of Italy, the Greek social security system, the effect of a company’s unfunded pension liabilities on its stock market valuation, and the returns of Spanish balanced pension plans and portfolio performance.

With contributions from well-known, international academics and professionals, this book will assist pension fund executives, risk managers, consultants, and academic researchers in attaining a clear picture of the integration of risks in the pension world. It offers a comprehensive, contemporary account of how to handle the risks involved with pension funds.

Preface ix

Editors xvii

Contributor Bios xix

Contributors xxxiii

Part 1 Financial Risk Management

Chapter 1 Quantifying Investment Risk in Pension Funds Shane Francis Whelan 003

Chapter 2 Investment Decision in Defined Contribution Pension Schemes Incorporating Incentive Mechanism Bill Shih-Chieh Chang Evan Ya-Wen Hwang 039

Chapter 3 Performance and Risk Measurement for Pension Funds Auke Plantinga 071

Chapter 4 Pension Funds under Inflation Risk Aihua Zhang 085

Chapter 5 Mean–Variance Management in Stochastic Aggregated Pension Funds with Nonconstant Interest Rate Ricardo Josa Fombellida 103

Chapter 6 Dynamic Asset and Liability Management Ricardo Matos Chaim 129

Chapter 7 Pension Fund Asset Allocation under Uncertainty Wilma de Groot Laurens Swinkels 157

Chapter 8 Different Stakeholders' Risks in DB Pension Funds Theo Kocken Anne de Kreuk 167

Chapter 9 Financial Risk in Pension Funds: Application of Value at Risk Methodology Marcin Fedor 185

Chapter 10 Pension Scheme Asset Allocation with Taxation Arbitrage, Risk Sharing, and Default Insurance Charles Sutcliffe 211

Part II Technical Risk Management

Chapter 11 Longevity Risk and Private Pensions Pablo Antolin 237

Chapter 12 Actuarial Funding of Dismissal and Resignation Risks Werner Hürlimann 267

Chapter 13 Retirement Decision: Current Influences on the Timing of Retirement among Older Workers Gaobo Pang Mark J. Warshawsky Ben Weitzer 287

Chapter 14 Insuring Defined Benefit Plans in Germany Ferdinand Mager Christian Schmieder 315

Chapter 15 The Securitization of Longevity Risk in Pension Schemes: The Case of Italy Susanna Levantesi Massimiliano Menzietti Tiziana Torri 331

Part III Regulation and Solvency Topics

Chapter 16 Corporate Risk Management and Pension Asset Allocation Yong Li 365

Chapter 17 Competition among Pressure Croups over the Determination of U.K. Pension Fund Accounting Rules Paul John Marcel Klumpes Stuart Manson 389

Chapter 18 Improving the Equity, Transparency, and Solvency of Pay-as-You-Go Pension Systems: NDCs, the AB, and ABMs Carlos Vidal-Meliá María Del Carmen Boado-Penas Ole Settergren 419

Chapter 19 Risk-Based Supervision of Pension Funds in the Netherlands Dirk Broeders Marc Pröpper 473

Chapter 20 Policy Considerations for Hedging Risks in Mandatory Defined Contribution Pensions through Better Default Options Gregorio Impavido 509

Chapter 21 Pension Risk and Household-Saving over the Life Cycle David A. Love Paul A Smith 549

Part IV International Experience in Pension Fund Risk Management

Chapter 22 Public and Private DC Pension Schemes, Termination Indemnities, and Optimal Funding of Pension System in Italy Marco Micocci Giovanni B. Masala Giuseppina Cannas 581

Chapter 23 Efficiency Analysis in the Spanish Pension Funds Industry: A Frontier Approach Carmen-Pilar Martí-Ballester Diego Prior-Jiménez 597

Chapter 24 Pension Funds under Investment Constraints: An Assessment of the Opportunity Cost to the Greek Social Security System Nikolaos T. Milonas George A Papachristou Theodore A. Roupas 637

Chapter 25 Pension Fund Deficits and Stock Market Efficiency: Evidence from the United Kingdom Weixi Liu Ian Tonks 659

Chapter 26 Return-Based Style Analysis Applied to Spanish Balanced Pension Plans Laura Andreu Cristina Ortiz José Luis Sarto Luis Vicente 689

Index 707