Impact of the choice of risk assessment time horizons on defined benefit pension schemes. (9th July 2022)

• Record Type: Journal Article
• Authors: Andrews, Douglas; Bonnar, Stephen; Curtis, Lori J.; Oberoi, Jaideep S.; Pittea, Aniketh; Tapadar, Pradip
• Is Part Of: Annals of actuarial science. Volume 16:Number 2(2022)
• Page Start: 214
• Page End: 242
• Publication Date: 2022-07-09
• Subjects: Defined benefit pension schemes -- Risk assessment -- Economic capital -- Time horizon -- Asset allocation strategies -- Contribution rates; G11 -- G23 -- G28; Actuarial science -- Periodicals; Insurance, Life -- Periodicals; 368.010941
• DOI: 10.1017/S1748499521000178
• Languages: English
• ISSNs: 1748-4995

Abstract

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 the 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.