The liability market value as benchmark in pension fund performance measurement

Abstract

AbstractOften performance of pension funds is assessed based on the development of the assets only, neglecting the simultaneous development of the liabilities. This especially is the case in Switzerland, one of the world's largest markets for corporate pension funds. We create a new liability benchmark for referencing the asset performance. Measuring the asset performance with respect to the liability benchmark yields the Asset-Liability-Result. We apply the model to (i) the Swiss pension fund market as a whole and (ii) an individual Swiss pension fund. With our new approach, we are able to show that the pension funds’ recovery from the recent financial crisis took much longer than the value increase of the asset portfolios suggests. We strongly advocate the use of a liability benchmark for analyzing the entire pension fund markets’ performance and specifically as operational tool for individual pension funds.