Dr Pradip Tapadar, Senior Lecturer in Actuarial Science at the School of Mathematics, Statistics and Actuarial Science has co-authored a paper with Dr Jaideep Oberoi (Kent Business School), Dr Aniketh Pittea (former SMSAS PhD student), along with collaborators from the University of Waterloo, entitled ‘Impact of the choice of risk assessment time horizons on defined benefit pension schemes‘
The paper, published in the journal Annals of Actuarial Science examined the implications of using different time horizons for quantifying pension scheme risks on the long-term financial health of a defined benefit (DB) pension scheme.
The researchers found that the difference in risk assessment time horizon generates contradictory conclusions regarding the best approach to manage risk through changes in asset allocation. Over the long term, increasing a scheme’s allocation to long-term bonds worsens the risk profile, both reducing the median level of surplus and increasing the spread of deficit. When examined over the shorter time horizon, increasing a scheme’s allocation to long-term bonds reduces the median surplus but this also reduces the spread from the median, which can be misinterpreted as risk reduction. This particular finding suggests that the widespread implementation of the so-called de-risking strategies, such as moving away from predominantly equity investments to greater bond investments, might be harming the long-term financial health of the schemes by taking a short-term view of a scheme’s financial status.
The paper also found that the impact on a scheme’s financial status from changing contribution rates is much smaller than the impact of changes to the scheme’s asset allocation.
The full paper is available to read on the publisher’s website, here:
https://www.doi.org/10.1017/S1748499521000178