Pension Fund Investment Strategy: A Quantitative Study for the Asset Allocation in UK Defined Benefit Pension Schemes

He, Pei (2008) Pension Fund Investment Strategy: A Quantitative Study for the Asset Allocation in UK Defined Benefit Pension Schemes. [Dissertation (University of Nottingham only)] (Unpublished)

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In recent years, the so-called pension crisis in the UK has drawn large attention in both business and academic world (Booth et al. 2004; Billings et al. 2006; O'Brien and Woods, 2006). In addition, it has become an important public issue since pension plays a central part in social welfare (Ombudsman, 2006). One important element that characterises this crisis is the large scale of the deficits reported by major listed companies in respect of their defined benefit pension schemes. Such deficits are partly due to the falling equity market and partly because of the overall increasing longevity of pensioners. More importantly, the strategic pension asset allocation has been seen as critical determinant of pension fund investment performance (Myners, 2001). However, the pension asset allocation is an under-resourced activity and struck by lack of clear objective and guidance (Myners, 2001). Therefore, the empirical analysis of how do pension fund trustees make their asset allocation decision in practice is of value to the pension fund profession, pension accountants and legislation regulators and the public at large.

This paper contribute to the literature on pension fund investment strategy by providing the first multivariable analysis for UK defined benefits pension scheme asset allocation in the form of both cross section and panel data, using the data collected from the annual reports of a total 85 UK companies in the FTSE-100 at 1st May 2008 (FTSE, 2008). Our findings indicate that there are statistically significant relationships between pension asset allocation as independent variable and scheme maturity, scheme solvency, level of employer contribution and turnover volatility as independent variables. The findings support the view that: 1. Pension fund trustees tend to take more equity risk if they have a longer investment horizon; 2. Trustees became cautious about equity risk and tended to chose more conservative investment strategy (i.e. bonds) if they have experienced a high level of employer contribution; 3. Employer wants bond investment in pension scheme to balance its high risk of income volatility, and trustees view employer covenant as weak if income volatility is high, and therefore they prefer bonds as well. Factors including gearing, profitability and cash flow volatility are not statistically significant determinants of asset allocation. However, these factors are expecting to become more significant in the future as many UK trustees start to become more conscious that they may have a weak employer covenant.

Item Type: Dissertation (University of Nottingham only)
Keywords: pension crisis,pension fund investment performance,pension fund investment strategy,pension scheme asset allocation,defined benefit pension schemes,
Depositing User: EP, Services
Date Deposited: 11 Sep 2008
Last Modified: 26 Jan 2018 02:46

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