Pension Fund Regulation and Risk Management: Results from an Alm Optimisation Exercise

Abstract

This paper provides a stylised assessment of the impact of investment-relevant pension fund regulations and accounting rules on contribution and investment strategies within the context of an asset-liability model (ALM) specifically designed for this purpose. The analysis identifies a substantial impact of regulations which, in a simplified way, resemble those in place in Germany, Japan, the Netherlands, United Kingdom and the United States. The ALM model shows that regulations affect funding costs primarily through the choice of investment strategy. Strict funding regulations may force sponsors to make up funding shortfalls in bad economic times and lead them to invest more conservatively, which ultimately raises net funding costs. The paper also shows that fair value accounting standards (with immediate recognition of actuarial gains and losses) can contribute to higher funding levels than required by regulators.