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Effects of scheme default insurance on decisions and financial outcomes in defined benefit pension schemes

Published online by Cambridge University Press:  28 March 2013

Adam Butt
Adam Butt*
Affiliation:
College of Business and Economics, Australian National University, Australia
*
*Correspondence to: Adam Butt BCom PhD FIAA, Lecturer, Research School of Finance, Actuarial Studies and Applied Statistics, College of Business and Economics, Australian National University, ACT Australia 0200 E-mail: adam.butt@anu.edu.au
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Abstract

A simulation investigation of the effect of default insurance on the optimal equity allocation and deficit spread period of a model defined benefit pension scheme is performed, using the old and new frameworks of the Pension Protection Fund in the U.K. as a starting point. The old default insurance levy framework encourages an increase in the allocation to equities, creating an indirect effect of increased deficits. The new framework reverses the effect to a reduction in the allocation to equities, thus reducing deficits. In addition the gaming element of default insurance is investigated and found to significantly increase optimal equity allocation and deficit spread period, leading to a significant increase in deficits.

Keywords

Defined benefit pensionsDefault insuranceMonte Carlo methods
Type
Papers
Information
Annals of Actuarial Science , Volume 7 , Issue 2 , September 2013 , pp. 288 - 305
Copyright
Copyright © Institute and Faculty of Actuaries 2013 

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