Skip to main content Accessibility help
×
Home

Funding Defined Benefit pension schemes: an integrated risk management approach

  • C. A. Cowling, H. J. Fisher, K. J. Powe, J. P. Sheth and M. W. Wright...

Abstract

The last 12 years have seen the evolution of a new funding regime under the supervision of the Pensions Regulator. Over this period, there has been significant turbulence in financial markets, including record low interest rates. This paper takes a critical look at the development of funding approaches and methodologies over this period. It analyses the Pensions Regulator guidance and how scheme specific actuarial methods have emerged since the move away from the Minimum Funding Requirement in 2001 and the introduction of the Scheme Specific Funding Requirements in 2005. It asks whether these new methodologies have been successful from the perspective of members, trustees, employers and shareholders. At a time when actuarial valuation methodologies have faced considerable criticism, this paper aims to propose a pension funding methodology which is fit for purpose and also reflects the latest guidance from the Pensions Regulator on integrated risk management.

  • View HTML
    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      Funding Defined Benefit pension schemes: an integrated risk management approach
      Available formats
      ×

      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      Funding Defined Benefit pension schemes: an integrated risk management approach
      Available formats
      ×

      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      Funding Defined Benefit pension schemes: an integrated risk management approach
      Available formats
      ×

Copyright

This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.

Corresponding author

*Correspondence to: Charles Cowling, JLT Employee Benefits, St James’s Tower, 7 Charlotte Street, Manchester M1 4DZ, UK. E-mail: charles_cowling@jltgroup.com

References

Hide All
Bader, L.N. (2004). Pension deficits: an unnecessary evil. Financial Analysts Journal, 60(3), 1521.
Bader, L.N. & Gold, J. (2003). Reinventing pension actuarial science. The Pension Forum, 14(2), Pensions Section of the Society of Actuaries.
Black, F. (1980). The tax consequences of long-run pension policy. Financial Analysts Journal, 36, 2128.
Bodie, Z. (1994). On the risk of stocks in the long run. Harvard Business School Working Paper No. 95–013.
Chapman, R.J., Gordon, T.J. & Speed, C.A. (2001). Pensions, funding and risk. British Actuarial Journal, 33, 605662.
Coronado, J.L. & Sharpe, S.A. (2003). Did pension plan accounting contribute to a stock market bubble? in Brookings Papers on Economic Activity. (ed. William C., Brainard & George L. Perry). Washington, DC: The Brookings Institution.
Cowling, C.A., Gordon, T.J. & Speed, C.A. (2004). Funding defined benefit pension schemes. British Actuarial Journal, 11(3), 497518.
Exley, C.J. & Armitage, S. (1997). Personal tax and the cost of equity. Paper presented to the Joint Institute and Faculty of Actuaries Investment Conference, June 2000, available at www.gemstudy.com. Accessed 8th March 2005.
Exley, C.J., Mehta, S.J.B. & Smith, A.D. (1997). The financial theory of defined benefit pension schemes. British Actuarial Journal, 3, 835966.
Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305360.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 7791.
McLeish, D.J.D. & Stewart, C.M. (1987). Objectives and methods of funding defined benefit pension schemes. Journal of the Institute of Actuaries, 114, 338424.
Meulbroek, L.K. (2000). The efficiency of equity-linked compensation: understanding the full cost of awarding executive stock options. Harvard Business School Working Paper No. 00-056, available at http://ssrn.com/abstract=215530. Accessed 7th February 2019.
Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48, 261297.
Ralfe, J., Speed, C. & Palin, J. (2004). Pensions and capital structure: why hold equities in the pension fund? North American Actuarial Journal, 9(4), 123125.
Rauh, J.D. (2017). Hidden debt, hidden deficits, 2017 ed. Stanford, CA: Hoover Institution.
Sharpe, W.F (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425442.
Speed, C.A., Bowie, D., Exley, J., Jones, M., Mounce, R., Ralston, N., Spiers, T. & Williams, H. (2003). The relationship between pension scheme assets and liabilities. Paper presented to the Staple Inn Actuarial Society. London: Staple Inn.
Tepper, I. (1981). Taxation and corporate pension policy. Journal of Finance, 36, 113.
Thornton, P.N. & Wilson, A.F. (1992). A realistic approach to pension funding. Journal of the Institute of Actuaries, 119, 229312.
Treynor, J. (Walter Bagehot) (1972) Risk and reward in corporate pension funds. Financial Analysts Journal, 28(1), 80–84.

Keywords

Metrics

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