PENSION FUNDS
Author: Sagar Dandge
Sustainable Investing and Fiduciary Obligations in Pension Funds
MUIR (2022) State that the role of pension funds in sustainable investing. they examine the differences in implementing rules for ESG factors in the US and South Africa. The author suggests legislative changes to provide stable guidance for U.S. pension plan fiduciaries. The article is published by the American Business Law Journal and is open access.
Effects of COVID‐19 early release of pension funds
Migul Lorca (2021) state that the impact of early access to individual retirement savings accounts in Chile during the COVID-19 pandemic, finding that a 10% release led to an average withdrawal of 22.92%, resulting in a drop of 8% in the system’s aggregate savings balance and reducing pension benefits by 7.26% on average, with greater losses for women and low-income workers. This erosion in savings balances exacerbates income inadequacy and inequality in retirement, requiring a 4.33% increase in government expenditure to counteract for those aged 65. The study underscores the importance of addressing challenges in defined contribution schemes through strategic design rather than solely relying on end-of-life supplementation. It proposes four mitigation policies to tackle inequalities arising from the labour market and the pension system, demographic shifts, and risk-sharing, advocating for a more efficient system design to enhance pension benefits, increase legitimacy, and alleviate political and fiscal pressures. These measures are deemed more effective and politically feasible than simple parameter adjustments like raising the retirement age or reducing pension sizes.
The asset allocation of defined benefit pension funds
ZHAO and SUTCLIFFE (2021) they conclude factors influencing pension fund asset allocation among 125 UK-listed companies in the FTSE 100 index from 2003 to 2019. Employing panel regressions with ten explanatory variables, including effective duration and scheme closure, the analysis reveals a positive correlation between less mature pension schemes and higher equity investments, alongside evidence of de-risking trends and lower equity allocations for firms with hard-closed schemes. Results also suggest an inverted U-shaped effect of funding ratios on equity allocation, influenced by overseas liabilities and leverage. Larger schemes exhibit stronger de-risking responses, while scheme-specific variables and economic factors explain 40% of asset allocation variation, indicating potential extensions to include FTSE 350 constituents and additional control variables such as acquisitions and mergers. Future research could explore pension scheme asset allocation in developing countries, considering varying regulatory environments.
Mutual Funds vs. Pension Funds
DEL GUERCIO and TKAC (2002) they state that the differences in the flow-performance relationship between mutual fund and pension fund managers, highlighting distinct client behaviours and managerial incentives. Pension fund managers attract assets by demonstrating positive Jensen’s alpha and low tracking error, with flow driven by benchmark outperformance. In contrast, mutual fund flows correlate strongly with excess returns and Jensen’s alpha, albeit influenced by Morningstar star ratings. Client responses to poor performance differ, with pension sponsors withdrawing assets while mutual fund investors exhibit more inertia. Unique findings include the autocorrelation of mutual fund flows and a negative relation between manager flow and asset size in the pension segment. While the study’s sample period ends in 1994, the authors anticipate the results to hold based on subsequent literature and industry continuity. However, deeper analysis is warranted on issues such as manager styles, investment horizons, and the evolving landscape of fund evaluation criteria.
Union-Non-union Differences in Pension Fund Investments and Earnings
DORSEY and TURNER (1990) the study investigates the performance of different types of pension funds in the context of social investing concerns, particularly focusing on union and non-union funds over a ten-year period from 1977 to 1986, characterized by significant economic fluctuations. Surprisingly, the findings reveal no substantial differences in portfolio composition, risk, or returns between single-employer union and non-union pension funds, indicating similar investment strategies regardless of union presence. However, multi-employer union funds differ, holding a larger proportion of bonds and exhibiting a less risky portfolio. Although these funds initially experienced lower risk-adjusted returns, this disparity diminishes over time, suggesting that early perceptions of social investing effectiveness may have been influenced by external factors, such as regulatory changes. Despite increasing interest in social investing, regulatory restrictions in the early 1980s potentially limited its impact on pension fund earnings and capital allocation in subsequent years.
Pension Fund Activism and Firm Performance
WAHAL (1996) the author examine the effectiveness of pension fund activism by analyzing firms targeted by the nine most active funds between 1987 and 1993. The findings reveal that pension funds utilize various monitoring mechanisms and achieve moderate success in altering the governance structure of targeted firms, with 40 percent of proxy proposals aimed at corporate governance changes being adopted. However, the announcement of targeting does not consistently lead to abnormal stock returns, though a subset of firm’s experience positive abnormal returns without proxy targeting. Moreover, targeted firms exhibit negative abnormal stock performance both before and after targeting, with no discernible improvement in accounting measures of performance. Despite this underperformance, pension funds maintain their holdings in targeted firms, while other institutions reduce theirs, raising doubts about the effectiveness of pension fund activism in enhancing firm performance.
Longevity Selection and Liabilities in Public Sector Pension Funds
FONG at el (2015) this author examines longevity risk in Australian civil service pension schemes, highlighting aggregate and scheme-specific selection risks, computational risk, and unexpected longevity shocks. It finds lower mortality risks among pensioners compared to the general population and identifies scheme-specific selection risks in certain occupational schemes, affecting pension obligations. Computational errors and unexpected longevity shocks contribute to underestimations of unfunded liabilities, particularly for older age structures. The study emphasizes the importance of managing these risks diligently, especially as pension plan demographics evolve, to ensure the sustainability of defined benefit plans.
Optimal investment for a pension fund under inflation risk
ZHANG and EWALD (2010) the article explores optimal investment strategies for a defined contribution pension fund manager in the face of inflationary risk. It considers a scenario where a member contributes a fixed portion of their salary over a finite time horizon, investing in a mix of risk-free bonds, index bonds, and stocks. The goal is to maximize the expected utility of the pension fund’s terminal value. The study proposes a solution approach utilizing the martingale method, particularly beneficial when there’s a positive endowment or contribution involved. Overall, it offers insights into effectively managing investment decisions within defined contribution pension plans amidst inflationary pressures.
Budgeting and Monitoring Pension Fund Risk
SHARPE (2002) state that Combining a risk model with a fund’s investment attributes yields numerous benefits, facilitating portfolio management and risk oversight. Policy-based portfolios help set targets and allocate resources for manager oversight and monitoring. Analyzing actual portfolios against policy holdings identifies discrepancies, prompting necessary adjustments. Despite limited adoption, defined-benefit pension funds can leverage risk budgeting and monitoring for enhanced risk management. As more funds embrace these procedures, analysts and managers will better understand their effectiveness and address implementation challenges. While risk budgeting generates substantial data, refining methodologies will ensure the extraction of valuable insights over time.
The Value of Guarantees on Pension Fund Returns
PENNACCHI (1999) state that Proposed social security reforms aim to privatize pension obligations through mandatory contributions to defined contribution pension plans, introducing individuals to investment risks previously absent in government-sponsored defined benefit plans. To garner public support, governments often offer guarantees to mitigate investment risks. Recent advancements in contingent claims analysis, particularly the martingale pricing approach, facilitate the valuation of pension guarantees with minimal assumptions. This method enables the assessment of defined contribution rate of return guarantees and minimum pension guarantees for individual workers. Risk-based insurance premiums, informed by individual guarantee values, can reduce government subsidies and economic distortions associated with guarantee provisions. Aggregating individual guarantee values aids in calculating the government’s total liability, offering a more accurate depiction of fiscal policy within measures of government spending.
SUMMARY
This articles cover a range of topics related to pension funds and investment strategies. They delve into sustainable investing practices and fiduciary obligations, examining differences in ESG implementation between the US and South Africa. Another study explores the impact of COVID-19 on pension savings in Chile, highlighting significant withdrawals and subsequent reductions in retirement benefits, especially affecting women and low-income workers. Additionally, research analyses asset allocation trends in UK-defined benefit pension funds, showing correlations with scheme maturity and economic factors. Differences in client behaviour and managerial incentives between mutual funds and pension funds are also investigated, along with union-non-union disparities in pension fund investments. Moreover, the effectiveness of pension fund activism in improving firm performance and the management of longevity risks in public sector pension schemes are examined. Furthermore, optimal investment strategies amidst inflationary risks and the value of guarantees on pension fund returns are discussed, along with the importance of budgeting and monitoring pension fund risk for enhanced management and oversight.
References:-
DEL GUERCIO, D.; TKAC, P. A.(2002) The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds vs. Pension Funds. Journal of Financial & Quantitative Analysis, [s. l.], v. 37, n. 4, p. 523–557, 2002. DOI 10.2307/3595011. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=f330e6c2-a927-3518-a992-18b455d38845. Acesso em: 23 fev. 2024.
DORSEY, S.; TURNER, J. (1990) Union-Non-union Differences in Pension Fund Investments and Earnings. ILR Review, [s. l.], v. 43, n. 5, p. 542–555, 1990. DOI 10.1177/001979399004300503. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=5d45ee69-4d56-3987-a550-683041a1ff63. Acesso em: 23 fev. 2024.
FONG, J. H.; PIGGOTT, J.(2015); SHERRIS, M. Longevity Selection and Liabilities in Public Sector Pension Funds. Journal of Risk & Insurance, [s. l.], v. 82, n. 1, p. 33–64, 2015. DOI 10.1111/j.1539-6975.2013.12005.x. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=6411578c-f9fc-30fa-9d02-168b8d4cba88. Acesso em: 23 fev. 2024.
Migul Lorca. (2021) Effects of COVID‐19 early release of pension funds: The case of Chile. Journal of Risk & Insurance, [s. l.], v. 88, n. 4, p. 903–936, 2021. DOI 10.1111/jori.12365. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=d1c4d7d1-b732-3958-a279-fd82511e22ee. Acesso em: 23 fev. 2024.
MUIR, D. M. (2022) Sustainable Investing and Fiduciary Obligations in Pension Funds: The Need for Sustainable Regulation. American Business Law Journal, [s. l.], v. 59, n. 4, p. 621–677, 2022. DOI 10.1111/ablj.12216. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=8a7ea556-e9ef-33e1-aa14-639a5c0c2de3. Acesso em: 23 fev. 2024.
PENNACCHI, G. G.(1999) The Value of Guarantees on Pension Fund Returns. Journal of Risk & Insurance, [s. l.], v. 66, n. 2, p. 219–237, 1999. DOI 10.2307/253610. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=95e89925-84ec-34f0-895e-a962b63dfde1. Acesso em: 23 fev. 2024.
SHARPE, W. F.(2002) Budgeting and Monitoring Pension Fund Risk. Financial Analysts Journal, [s. l.], v. 58, n. 5, p. 74, 2002. DOI 10.2469/faj.v58.n5.2470. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=8905badd-b3de-3b3e-8cc1-bbc203fd5032. Acesso em: 23 fev. 2024.
WAHAL, S.(1996) Pension Fund Activism and Firm Performance. Journal of Financial & Quantitative Analysis, [s. l.], v. 31, n. 1, p. 1–23, 1996. DOI 10.2307/2331384. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=b429daff-85d7-3623-8fc9-bd0e149e22ad. Acesso em: 23 fev. 2024.
ZHANG, A.; EWALD, C.-O.(2010) Optimal investment for a pension fund under inflation risk. Mathematical Methods of Operations Research, [s. l.], v. 71, n. 2, p. 353–369, 2010. DOI 10.1007/s00186-009-0294-5. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=b69aaaf7-dd8a-3b25-b00e-8b1c2bd3aa4c. Acesso em: 23 fev. 2024.
ZHAO, Z.; SUTCLIFFE, C.(2021) What determines the asset allocation of defined benefit pension funds? Applied Economics, [s. l.], v. 53, n. 36, p. 4178–4191, 2021. DOI 10.1080/00036846.2021.1897512. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=e2675ebc-e16d-3369-9074-23d61a0972f3. Acesso em: 23 fev. 2024.
