Skip to main content Accessibility help

The missing link: economic exposure and pension plan risk

  • Paul Sweeting (a1) (a2), Alexandre Christie (a2) and Edward Gladwyn (a3)


The funding position of a defined benefit pension plan is often closely linked to the performance of the sponsoring company’s business. For example, a plan sponsor whose financial health is dependent on high oil prices may struggle during periods of oil price weakness. If the pension plan’s assets perform poorly at this time, the ability of the sponsor to address any funding requirement could be restricted precisely when the need for funding is heightened. In this paper, we propose an approach to dealing with joint plan and sponsor risk that can provide protection against extreme adverse events for the sponsor. In particular, adopt a strategy of minimising a portfolio’s expected losses in the event of an assumed drop of x% in the oil price. Our methodology relies on an asset allocation framework that takes into account the impact of serial correlation in asset returns, as well as the negative skewness and leptokurtosis resulting from the non-normal shape of marginal distributions of historical asset returns. We also make use of copulas to measure the dependence between asset class returns.


Corresponding author

*Correspondence to: P.J. Sweeting, School of Mathematics, Statistics and Actuarial Science, Cornwallis Building, University of Kent, Canterbury, Kent CT2 7NF, United Kingdom. Tel: +44(0)1227 827181; Fax: +44(0)1227 827932; E-mail:


Hide All
Acerbi, C. & Tasche, D. (2001). Expected shortfall: a natural coherent alternative to value at risk, economic notes. Economic Notes, 31, pp. 379–388.
Azzalini, A. & Capitanio, A. (2003). Distributions generated by perturbation of symmetry with emphasis on a multivariate skew t distribution. Journal of the Royal Statistics Society, 65, 367389.
Bagehot, W. (pseudonym of J. L. Treynor) (1972). Risk in corporate pension funds. Financial Analysts Journal, 28, 8084.
Campbell, J. & Viceira, L. (2002). Strategic Asset Allocation. Oxford University Press, Oxford.
Fisher, J., Geltner, D. & Webb, B. (1994). Value indices of commercial real estate: a comparison of index construction methods. The Journal of Real Estate Finance and Economics, 9, 137164.
Graham, B. & Dodd, D. (1934). Security Analysis. McGraw-Hill, New York, NY.
Ippolito, R.A. (1985). The economic function of underfunded pension plans. Journal of Law and Economics, 28, 611651.
Jorion, P. (2006). Value at Risk: The New Benchmark for Managing Financial Risk. McGraw-Hill, New York.
Kemp, M.H.D. (2011). Sponsor covenants in risk-based capital. Life & Pension Risk, 7, 3640.
Nelsen, R.B. (1999). An Introduction to Copulas. Springer, New York.
Sharpe, W. (1974). Imputing security returns from portfolio composition. The Journal of Financial and Quantitative Analysis, 9, 463472.
Sharpe, W.F. (1976). Corporate pension funding policy. Journal of Financial Economics, 3, 183193.
Sheikh, A. & Hongtao, Q. (2009). The non-normality of market returns, J.P. Morgan Asset Management, New York.
Sweeting, P.J. (2006). Correlation and the pension protection fund. Fiscal Studies, 27, 157182.


The missing link: economic exposure and pension plan risk

  • Paul Sweeting (a1) (a2), Alexandre Christie (a2) and Edward Gladwyn (a3)


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed