A Review of Asset Allocation of UK Defined Benefit Private Pension Schemes And The Factors Determining Asset Allocations.

Antha, Evelina (2011) A Review of Asset Allocation of UK Defined Benefit Private Pension Schemes And The Factors Determining Asset Allocations. [Dissertation (University of Nottingham only)] (Unpublished)

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Following the economic crisis which resulted in uncertainty of trustees to meet pension obligations, institutional investors are becoming more conscious of investment risks. They risk getting less return than previously forecasted, as a result of falling prices in the equity market. In turn, to mitigate the risk the investment strategy of the schemes has been greatly influenced. Pension schemes currently have a tendency to shift their investment strategy from return-seeking to a liability driven strategy. Moreover, researchers have reported that the UK ageing population will grow significantly within the next few years, thus there is an important recognition that pension schemes assets should also be increased considerably to provide sufficient income to meet pension obligations. The main issue for pension schemes investment managers is how to invest their assets to ensure that the funds will be available to pay pension obligations when due.

The findings from this research indicate that wide dispersion exists in the asset allocation. Investment in equity ranges from 15.7% to 87.6% while that of bond varies from 0% to 68%. We found that shifts in asset allocation depend on the market conditions. Prior to the recent financial crisis, pension schemes had more equity exposure than to bond. However, following the economic crisis and the collapse of the stock market most pension schemes investment have underperformed and reported significant deficits. As a consequence pension schemes are shifting their investment into bonds.

This paper empirically studies the strategic asset allocation of UK defined benefit private pension schemes. It also looks at the factors influencing UK private pension schemes investment decision. The results indicate that funding level is a major determinant of asset allocation. Other rationale for schemes asset allocation is explained by factors that are not tested in this research e.g. actuary’s expectations, investment regulations; scheme maturity, liability profile and trustees’ attitude of risks. Some of these factors have been identified from the survey respondents; while other causes remain unexplained. Testing whether these factors empirically do have an influence on asset allocation could be an interesting topic for further research.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 05 Aug 2011 09:38
Last Modified: 22 Oct 2016 22:38
URI: http://eprints.nottingham.ac.uk/id/eprint/24737

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