Pension Plan Liabilities Research Articles

How should unsmoothing affect pension plan asset allocation?

Examines the impact of using “unsmoothing” techniques on real estate data to take pension‐plan asset‐allocation decisions. It is generally believed that valuation‐based real estate indices give rise to returns figures which are “smoothed” versions of the underlying transaction prices. Unsmoothing techniques can be used to develop real estate return data series that are believed to be a more accurate representation of underlying transaction prices. If this is done, the resulting data reveal greater volatility of real estate returns. When such data are applied to portfolio selection models, they often reveal a reduced allocation to real estate in efficient portfolios. Looks at the impact of unsmoothing data when taking pension‐plan asset‐allocation decisions. Finds here that the unsmoothed data are more closely correlated with pension plan liabilities. As a result, efficient pension plan portfolios sometimes contain more real estate, rather than less. In general, there is little change in the efficient real estate allocation. These results are very important. They reveal that so‐called “valuation smoothing” may distort property investment decisions less than is commonly thought.

Pension‐Plan Real Estate Investment in an Asset–Liability Framework

This study explores the role of pension‐plan real estate investment in an asset–liability framework. By assuming that the pension‐plan manager wishes to have assets of at least equal value to the liabilities at all points in time, an asset selection process is derived which depends on both the asset's covariance with other assets and its covariance with the liability stream. We generally find real estate not to be highly correlated with pension‐plan liabilities. This finding is of general interest, since it helps to explain why pension‐plan real estate investment is extremely limited and much smaller than one would expect if pension‐plan investors cared only about the mean and variance of the real return to their invested wealth.

In Search of the Liability Asset

When one looks beyond the immediate pension plan liabilities represented by existing obligations, one sees a stream of long-term obligations that will shift as underlying economic factors such as inflation and productivity change. Thus the pension liability may be broken down into a short-term, bond-like component and a long-term, equity-like component. Plan investments need to meet the immediate obligations and avoid deterioration of the current asset/liability ratio, but they also need to maximize long-term returns in order to meet the long-term obligations.An all-equity portfolio meets the latter need, but is far too risky in the short term. A fully hedged, dedicated portfolio will ensure that short-term obligations are met, but will do little to increase asset value to meet the incremental, long-term obligations. The task confronting the pension plan sponsor is to construct the liability asset—the asset that will meet these disparate aspects of the pension liability.Doing so requires a dynamically adj...

Analysis of Investment Policy to Achieve Funding of Pension Plan Liabilities

Analysis of Investment Policy to Achieve Funding of Pension Plan Liabilities

PENSION PLAN LIABILITIES AND CORPORATE FINANCIAL STRATEGIES*

PENSION PLAN LIABILITIES AND CORPORATE FINANCIAL STRATEGIES*

Pension Plan Liabilities and Corporate Financial Strategies

Pension Plan Liabilities and Corporate Financial Strategies