Three Essays on Chinese and UK DefinedBenefit Pension Schemes

Abstract

This thesis contributes to the quantitative and qualitative analysis of optimal assetliability portfolio allocations for the Chinese basic pension fund (BPF) pillar 1B, based on various investment constraints; investigations of the determinants of the equity asset allocations of UK defined benefit (DB) pension schemes and the reasons for a hard freeze decision by these DB schemes. The first contribution is the application of an asset-liability model (ALM) to compare the effects of various investment constraints on the efficient portfolio of the BPF. Using an ALM, we investigate the effects of different investment limits, pooling investment by the national social security fund (NSSF) and raising retirement age, on asset allocations. We find that an ALM is superior, and removing the limits on investment in domestic assets would be beneficial, as would transferring the assets to the NSSF and raising the retirement age. The second contribution is the first empirical analysis of the effects of non-linear default risk, leverage, cash flow volatility, company or sponsor size and pension scheme maturity on the asset allocation of DB schemes. We investigate the determinants of the equity allocation of UK pension funds using a panel of 125 FTSE 100 companies from 2003 to 2019. Seven variables have a significant effect on the equity allocation with the biggest effects coming from scheme maturity, the scheme’s funding ratio and a time trend. The third contribution is the first empirical analysis of the reasons for a hard freeze decision of UK DB schemes. Using an expanded panel from the last study, we find that five variables have a significant effect on the probability of making a hard freeze decision. The results suggest that a hard freeze may also have led to some movement in their post-freeze values of these variables back towards their pre-freeze values.