1 / 17

Employer Pensions, Risk and Asset Allocation

Employer Pensions, Risk and Asset Allocation. Mike Orszag. Rome, April 2, 2003. Guarantees for Individuals. Pensioners paid first Others paid next Example: pension scheme 75% funded, 50% of liabilities pensioner liabilities Pensioners are paid in full, others get 50% of benefits.

yitro
Download Presentation

Employer Pensions, Risk and Asset Allocation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Employer Pensions, Risk and Asset Allocation Mike Orszag Rome, April 2, 2003

  2. Guarantees for Individuals • Pensioners paid first • Others paid next Example: pension scheme 75% funded, 50% of liabilities pensioner liabilities Pensioners are paid in full, others get 50% of benefits

  3. Level of Exposure to Risk • FTSE100 returns for 2001 • Pension liabilities / market cap: • average = 40% in 2001 • 8 companies over 100%

  4. Deficits 2001 FTSE100: £11bn By end of 2002 much, much worse (£170bn in equities in 2001)

  5. Liabilities Matter • Correlations: • volatility and pension liabilities/market cap - 0.46 Volatility and pension liabilities/free operating cashflow – 0.50 • Pension risk variables can explain roughly 25-35% of cross-sectional volatility in the market

  6. Employer Asset Allocation • Minimum risk is not necessarily in bonds • Equity in pension fund should depend on: • Maturity of pension scheme • Size of exposure to risk by company • Covenant risk

  7. Empirical Evidence • FRS17 disclosures for FTSE 100 for 2001 • How much do risk fundamentals impact on asset allocaiton?

  8. Empirical Evidence • Pension liabilities relative to wage/salary bill is a good measure of maturity • How correlated is it with equity allocation of pension fund? • Elasticity of equity share with respect to pension liabilities/wage salary bill is -0.002

  9. Maturity

  10. Maturity

  11. Empirical Evidence • Covenants – volatility of equity prices is a potentially good measure of how much debt a company has and therefore how strong the pension promise is • Implied and historical volatility • Elasticity of implied at the money volatility on calls on Nov. 19 is -0.039 (t statistic -0.34)

  12. Covenants

  13. Exposure • Pension liabilities relative to market cap is one measure • Elasticity is -0.26 – statistically insignificant from 0 • Pension deficits relative to pension liability is another • Elasticity is -0.13 – again statistically insignificant

  14. Pension Surplus/Pension Liability

  15. Pension Liabilities/Market Cap

  16. Putting it Together

  17. Putting it all together • Our four variables can explain only about one-tenth of cross-sectional differences in equity shares of pension funds. • High exposure to risk by companies • Not necessarily less risk for individuals

More Related