The current financial crisis has strongly affected the finan- cial status (expressed by the funding ratio) of most pension funds and their ability to grant full indexation of liabilities to the inflation rate. The indexation benefits represent a prior- ity for a participant of a pension fund bearing purchasing power risk. Differently from return-oriented optimization, we define an objective function based on the indexation decision, which is conditional on the financial status of the fund. This paper focuses on the definition of an ALM mod- el aimed to maximize the indexation granted by a defined benefit pension fund to its participants by introducing real assets in the portfolio, but also imposing risk-based regula- tion. The model is applied to the portfolio of the ABN AMRO pension fund, which aims to fully index its liabilities with re- spect to the Dutch inflation. The results suggest the initial funding ratio strongly affects the ability of the fund to set a fully-indexed investment strategy over longer time horizons, while changes in the risk aversion parameter have a limited influence. A crucial role is played by property, which is pre- ferred to equity, while commodities have risk diversification properties exploitable only in the long run for higher funding ratio, otherwise the regulatory framework takes the form of a barrier to invest in commodities.

Indexation as Primary Target for Pension Funds: implication for portfolio management

GALLO, ANGELA
2011-01-01

Abstract

The current financial crisis has strongly affected the finan- cial status (expressed by the funding ratio) of most pension funds and their ability to grant full indexation of liabilities to the inflation rate. The indexation benefits represent a prior- ity for a participant of a pension fund bearing purchasing power risk. Differently from return-oriented optimization, we define an objective function based on the indexation decision, which is conditional on the financial status of the fund. This paper focuses on the definition of an ALM mod- el aimed to maximize the indexation granted by a defined benefit pension fund to its participants by introducing real assets in the portfolio, but also imposing risk-based regula- tion. The model is applied to the portfolio of the ABN AMRO pension fund, which aims to fully index its liabilities with re- spect to the Dutch inflation. The results suggest the initial funding ratio strongly affects the ability of the fund to set a fully-indexed investment strategy over longer time horizons, while changes in the risk aversion parameter have a limited influence. A crucial role is played by property, which is pre- ferred to equity, while commodities have risk diversification properties exploitable only in the long run for higher funding ratio, otherwise the regulatory framework takes the form of a barrier to invest in commodities.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11386/3022932
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