Pension Reserve Funds Research Articles

Investment risk-taking and benefit adequacy under automatic balancing mechanism in the Japanese public pension system

The automatic balancing mechanism introduced in 2004 aims to re-establish the financial equilibrium of the Japanese public pension systems. The non-linear functions for benefits embedded in the automatic balancing mechanism make it challenging to analyse the impact of market fluctuations on the adequacy of benefits and the sustainability of the pension system. Using a stochastic simulation model applied to the government’s public pension verification programmes, the risk of benefit levels and financial stability according to risk-taking in pension reserve funds for the Japanese public pension system is investigated. The Japanese public pension system is characterised by a pay-as-you-go system with substantial reserve funds. Benefit adequacy is measured by the replacement rate and financial sustainability by the reserve-to-expenditure ratio. The results show that for a high level of risk-taking in the reserve fund, the risk of benefits increases because the automatic balancing mechanism reduces benefits until the pension system recovers solvency. In addition, the risk of reserve funds increases because of the possibility of sizeable negative investment returns. In contrast, when risk-taking is low, the benefit level is locked in at a low level because investment returns are insufficient. Therefore, moderate risk-taking of reserve funds should be adequate.

Two different paths to sustainability? A comparison of a Finnish and a Swedish public pension reserve fund

The role played by finance in allocating resources has become crucial in modern economies. Responsible Investing, i.e., the integration of non-financial criteria (such as environmental, social, and governance (ESG), negative/positive screening, and active ownership) into the investment process, has gained an important role. Does this apply to pension funds, too? This article compares two public pension reserve funds, one from Finland and one from Sweden, and describes their path towards responsible investments. The article shows that although having taken different paths, responsible investing has been clearly integrated into the investment process of both funds during the last decades. In Finland, the role played by pension fund insiders has been remarkable. In Sweden, legislators have played an active and significant role in the process. The design of the pension system equally plays an important role in the overall process. In Sweden, cooperation is promoted in responsible investments. In Finland, pension system design fosters competition, thereby reducing cooperation in investments. This article adds more information on the scarce comparative research on public pension reserve funds.

Governance, legitimacy, and decision-making capability of the Chinese national social security fund-against the backdrop of international comparison

To deal with the pension crisis, many countries have established the ‘Public Pension Reserve Funds (PPRFs)’. The Chinese government has also established the Chinese National Social Security Fund (NSSF), a typical PPRF to deal with the Chinese pension crisis. This paper focuses on the governance issues of the Chinese NSSF. More specifically, it focuses on the NSSF’s board to determine its decision-making capabilities, during which I will talk about the expertise and representation issues in the NSSF. The paper found that, first, the NSSF’s board may have more symbolic significance than substantive powers, which may be the result of the government’s endorsement of the legitimacy of the NSSF. Second, we found that the representation and expertise tension that prevail in Western pension funds governance also exist in China’s NSSF, and the analytical framework for this tension is also applicable to the discussion of Chinese cases. Third, through international comparison, we infer that an efficient board of directors might be a necessary condition for the pension funds’ good performance, but not a sufficient condition.

Effect of debt tax benefits on corporate pension funding and risk-taking

PurposeThis study theoretically investigates the impacts of tax benefits on funding level and risk-taking of a corporate defined benefit (DB) pension plan.Design/methodology/approachThe present value of the future tax benefits is maximized while the stockholders determine the funding level and investment risk-taking in DB plans. As a feature of DB plans, this study considers pension benefits to be pre-determined. Further, the pension beneficiary has a priority over the sponsor company's creditors for the pension reserve fund. These are seldom considered in previous studies.FindingsIt is desirable to decrease the funding level of DB plans to increase tax benefits. This is because the effect of tax exemption for the pension fund's investment income is eliminated by the change in the contribution arising from the investment's result. The optimal investment risk-taking depends on the funding level.Originality/valueThe impact of tax benefits on decision-making for DB plans is significantly different from that stated by previous studies, that is, an increase in pension funds will reduce the corporate debt. To explain corporate behavior, this study's results—derived from the essential feature of DB plans, which could not have been included in previous studies—should be considered.

Saving for the future: Evaluating the sustainability and design of Pension Reserve Funds

In several countries public finances are under pressure by pension obligations rising due to downward trends in fertility, increased longevity and financial markets with low interest rates. For these reasons, the establishment of Pension Reserve Funds (PRF) has flourished. Regardless of the specific objectives that these PRFs may have, a critical issue is to assess their sustainability over the long-run. Moreover, this sustainability analysis is particularly complex, due to the interaction between the macroeconomic environment, financial performance and the labor market.In this article, we use a projection model aimed to evaluate the sustainability of the PRF in a small open economy such as Chile. The case of Chile is interesting because it shares common features with economies open to international markets that have either defined benefits pension schemes and/or defined contribution schemes with minimum pension guarantees. Moreover, since the Chilean PRF features relatively well defined contribution and withdrawal rules, we have a framework against which our methodology can be used to explore the effects on PRF's sustainability of altering these rules.Our methodology takes into consideration the stochastic nature of macroeconomic, financial and labor market variables in order to evaluate the sustainability of the PRF. In contrast to deterministic measures such as funding ratios, our methodology is more appropriate to assess the role of the contribution and withdrawal rules for PRFs in evaluating the key underlying risks and their consequences for the sustainability of PRFs.

Portfolio Management in Public Pension Reserve Funds

This paper presents the basic principles and procedures of a theoretical portfolio management system and also the practical implementation and the actual results of real utilization efforts of such systems. Portfolio management of public pension reserve funds is one of the major factors that can contribute in the provision of adequate pension level. The key components of portfolio management are the chosen strategy of investment (active or passive portfolio management) and the sequential steps of the investment decision making process. Numerous studies focusing on the investment management behavior, function and practice have been conducted by various researchers and also the OECD. All of them have stressed the need of an effective portfolio management strategy in order to maintain a satisfactory level of pensions for the pensions fund beneficiaries.

Fiscal sustainability and the cyclically adjusted balance policy: Methodology and analysis for Chile

This paper sets forth a framework for analysing fiscal sustainability in the Chilean economy. It starts by making an ex post calculation of indicators of vulnerability and fiscal sustainability, based on the estimation of a sustainable debt level, with public finances considered in stationary state. It then develops an ad hoc dynamic fiscal sustainability model for Chile’s public finances, which for the first time incorporates the dynamic of the Pension Reserve Fund (FRP) with its accumulation and disbursement rules, together with the cyclically adjusted balance policy. Lastly, the study simulates the path of the budgetary central government’s net debt up to 2025, using the projections made in the 2018 Public Finance Report, under a macroeconomic trend scenario and another adverse scenario, all framed by the cyclically adjusted balance rule.

Pension reserve fund, political budget cycles and fiscal illusion

We model political manipulations of pension reserve funds in a modified Shi and Svensson (2006) political budget cycle (PBC) model. Assuming that a share of voters suffers from fiscal illusion the incumbent can increase her re-election chances by prematurely spending parts of the reserve fund. We also obtain results that are counterintuitive, but only at first sight. First, it can be shown that the incumbent wants to reduce the manipulation when her ego rent increases. Second, the optimal magnitude of manipulation does not necessarily go up when the share of voters suffering from fiscal illusion rises.

National Consciousness on the ESG Investment of the Pension Reserve Fund

National Consciousness on the ESG Investment of the Pension Reserve Fund

A State‐centred Explanation of the Finance‐Pension Nexus: New Zealand's Pension Reforms as a Typical Case

AbstractThis study analyses the decision‐making processes that led to the introduction of the New Zealand Superannuation Fund (a public pension reserve and investment fund), as well as the KiwiSaver Scheme, which is New Zealand's first soft‐compulsory private pension scheme. Why and how are governments engaged in the development of funded pensions? These are the questions this study addresses. In analyzing the finance‐pension nexus in New Zealand, this article adopts a state‐centric approach. It argues that pension funding reforms are shaped by state officials who pursue their own motives because policymakers frame funded pensions as an instrument for achieving broader fiscal, economic and financial policy outcomes. Because New Zealand is a typical case of a state‐centric explanation, a study of its pension funding reforms helps in finding causal links between finance and pensions.

Sovereign pension and social security reserve funds: A portfolio analysis

Sovereign wealth funds (SWFs) have been increasing in numbers and in the global reach of their investment activities. At the same time, they seem to experience the adverse consequences of the financial crisis differently than other financial intermediaries. This paper assesses whether and how a retirement-financing purpose has affected their investment strategies since the global financial crisis, as opposed to the strategies of other public pension entities that do not operate as SWFs. We construct a sample of 12 sovereign pension reserve funds (SPRFs) and social security reserve funds (SSRFs) and analyze the effects of size, operational model, country development, the fund's experience, and quality of disclosures on strategic asset allocation for the period 2007–2014. We also investigate the relevance of “home bias.” Our results show that SPRFs invest more aggressively than SSRFs, but are less exposed to domestic investments. We do not find major shifts in asset allocation induced by the financial crisis, except for a recent decrease of home-country exposures.

Sovereign Wealth Fund Investments and Stock Prices: The Effect of Target Industry and Location

In this work we investigate the determinants of sovereign wealth fund (SWF) investments’ stock prices. We focus on the location of the investment (domestic versus cross-border investments) and on the target industry (strategic versus non-strategic). We use a new dataset on SWF investments and stock prices, whose number of transactions is comparable with that used in the most popular SWF studies. To control for the endogeneity of the location and target industry choices, we use two identification strategies: an OLS estimation with residuals clustered at SWF country-level and SWF-specific fixed effects to control for the quality/experience of each fund, and an Instrumental Variables (IV) estimation. Our results show that on a 50-days window around the SWF investment, cross-border investments have an average higher increase in stock price than domestic SWF investments. While, on the same time window, SWF investments in strategic industries show an higher drop in stock price than SWF investments in non-strategic industries. We also find that the higher is the politicization of the fund, and the higher is the stock price drop. Our results are robust to controls for the presence of bilateral political relations between the SWFs’ and target country, fund type (SWFs vs. Sovereign Pension Reserve Funds), fund opacity, equity stake of the investment, the use of an investment vehicle, the target country’s market capitalization/GDP ratio, and time effects.

국민연금의 수급부담구조분석과 지속가능성

Abstract The National Pension of Korea is a public social security system designed to alleviate social risks andpoverty that has had a major impact on the quality of life for the aging population. However, a rapidlyaging population and low fertility threaten the sustainability of national pension in Korea. The NationalPension Research Institute publishes a nancial projection every ve years; consequently, the governmenthas lowered the entitlements for the sustainability of national pension based on the projection results. Thecurrent reform of the pension system that arbitrarily reduces the entitlements might detract from the incomesecurity role of the national pension for pensioners without accounting for the highest elderly poverty ratein the OECD countries.We rst discuss methods for the nancial projection of the national pension in terms of population, sub-scribers, and pensioner projections in order to estimate the pension reserve fund and the nancial depletionyear. We also conduct a sensitivity analysis for population variables, institutional variables, and economicvariables based on pension reserves and the nancial depletion year. We evaluate intergenerational fairnessbetween the income hierarchy by conducting a money’s worth analysis. Finally, we investigate the possi-bility of the sustainability of national pension by adjusting pension contributions and entitlements (incomereplacement rate). A new dependency ratio shows that a simple reform of the national pension does notsecure the sustainability of the national pension without adapting a pay-as-you-go system.Keywords: nancial projection of the national pension, sustainability, bene t/cost ratio, lifetime transfer,modi ed dependency ratio

Management of Pension Funds: the Case of Portugal

The concern with the long term viability of most of existing government-operated pension systems, due to demographic changes, have let to various proposals fpr pension reform, many of which have already been put into action. However, pension reform remains a highly controversial issue due to its complexity. This article brings attention to the management perfromance issue concerning funded systems. Detailed evidence and discussion is given to both investment performance results of public pension reserve funds, within the Social Security system, and private pension funds in Portugal. Policy implications are also analyses and discussed.

Funkcjonowanie państwowych funduszy rezerwowych o celu emerytalnym na przykładzie doświadczeń Norwegii

Pensions reserve funds are permanent elements of social security systems in many countries. In others they play important role of a useful solution that helps to alleviate temporary deficits in social security. One of the few countries that gath‑ ered very large pensions reserves is Norway. It is an excellent example of a country that uses oil revenues to fulfil the long ‑term liabilities of the social security system and promote solidarity between generations. The article analyses the sources of fundraising and methods of asset management used in Norwegian public reserve funds. The collection of large reserves was possible only due to permanent sur‑ plus in state budget resulting from oil revenues. Assets collected in the fund were then invested in highly diversified and long ‑term portfolio that proved to be very effective. Norwegian pension reserve fund Global showed that the right strategies of asset allocation and broad geographical diversifications may result in rates of return much higher than constructed benchmarks. Moreover, it can also meet the expectations of ethical and socially ‑responsible investments.

An Appraisal of Public Pension Reserve Funds Management - Evidence From Portugal

The creation of a public pension reserve fund is one of the reform measures that many countries implemented in order to guarantee the long term viability of existing government-operated pension systems. However, this measure raises the issue of the need to ensure sound management of those pension funds. This article focuses on the experience of the Portuguese public pension reserve fund and on the role it should accomplish in helping to finance the rising cost of public pensions. DOI: 10.5901/mjss.2014.v5n23p333

Fundusz Rezerwy Demograficznej – analiza działalności oraz konsekwencje przedterminowego wykorzystania aktywów

Demographic Reserve Fund (FRD) has been created in Poland in 2002 to offer additional source of financing for old-age pension system in case it faces significant deficit resulting from demographic reasons. This buffer fund aims mainly at balancing the incomes and expenditures of pension system in times when baby boomers will be offered old-age pension benefits. The main sources of its financing were defined as pension contributions and revenues from privatization of state owned companies. But after several years of its activity it has turned out that the operations of the fund came in contradiction with its main goals, mainly due to early usage of its assets. The article presents main characteristics of Polish Demographic Reserve Fund, basic principles of its functioning, portfolio structure and rates of return. Moreover, it tries to give some opinion in hot debate about the purposes and effects of accumulating assets in pension reserve funds in times of budget shortages.

Is there an alternative to the pay-as-you-go pension system in Serbia?

International pension reform experiences indicate that, amid demographic aging, each country needs to identify the reform policies most suited to its own economic and social environment. The economic analysis in this paper suggests that a potential prefunding of the Serbian pension system, either through a public pension reserve fund or mandatory private pension funds, would yield an economic performance inferior to the existing PAYG financing. If a wealth transfer from current to future generations is desirable from the macroeconomic or social perspective it should be implemented through repayment of outstanding public debt, not through pension system prefunding. Pension reform efforts should thus focus on parametric PAYG changes and adequate integration of voluntary retirement saving vehicles into the Serbian pension system.

Global Tactical Asset Allocation for Institutional Investment Management

The Alberta Investment Management Corporation (AIMCo) was established in 2008 to manage approximately C$70 billion on behalf of 26 pension, endowment, and government reserve funds in the Province of Alberta. The fund’s over-arching goal is to earn incremental return on risk over what our clients could achieve by passively implementing their policy asset mix with equity and fixed income index funds. One way to add return in excess of passive portfolios is through our Global Tactical Asset Allocation (GTAA) strategy. In this brief note, we provide a description of the ways in which AIMCo has developed and executed its GTAA process over the past few years. In so doing, we hope to offer some insights to other institutional investors that might be considering or preparing to launch a similar GTAA or tilting policy. We conclude that executing a successful GTAA requires developing world-class talent, systems, process and governance.

Managing Public Pension Reserve Funds: The Case of The Government Pension Investment Fund (GPIF) of Japan

Japan’s Government Pension Investment Fund (GPIF) has US$1.4 trillion in assets and is the world’s largest pension fund. The institutional structure and the investment style of GPIF differ from those of other Public Pension Reserve Funds (PPRF). This article describes how GPIF is structured and how it works, then compares it with Canadian and American PPRF approaches. Perspectives include the discretion exercised in investment decisions, information asymmetry, and accompanying agency and governance problems.