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Pension Fund Asset Valuation and Investment

Published online by Cambridge University Press:  10 June 2011

A.C.L. Dyson  and
C.J. Exley
A.C.L. Dyson
Affiliation:
William M Mercer Inc, 1166 Avenue of the Americas, New York, New York, 10036, U.S.A. E-mail: andrew-dyson@us.wmmercer.com
C.J. Exley
Affiliation:
William M Mercer, Wellington Plaza, 31 Wellington Street, Leeds, LS1 4DL, U.K. Tel: +44 (0)113 243 6671; E-mail: jon.exley@uk.wmmercer.com
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Abstract

The theoretical basis for, and practical application of, the discounted income method for valuing UK pension fund assets is discussed, with particular reference to the widely adopted application to variable income (equity type) assets, as proposed by Day & McKelvey (1964), in the context of both the management and compliance objectives of pension fund valuation. An alternative methodology is proposed in which consistency with assets, liabilities, and market values is demanded, with smoothing of the valuation result achieved on an explicit rather than implicit basis. It is then demonstrated that the explicit smoothing parameter can be set so as to achieve the historic smoothness framework for establishing pension fund investment policy.

In conclusion the paper suggests greater emphasis on market-related methodologies for compliance valuations and leaves open the choice of methodology for management valuations and monitoring purposes, on the grounds that there is a large subjective element in any realistic basis. However, it is demonstrated that while smoother than unadjusted market-related methods, other aspects of the dynamics of the funding level under the method of Day & McKelvey can be perverse and it is suggested that this method should not be allowed to dictate investment decisions.

Keywords

AssetsPension SchemesDisclosureSolvencyFundingInvestmentManagement
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 1 , Issue 3 , 01 August 1995 , pp. 471 - 557
Copyright
Copyright © Institute and Faculty of Actuaries 1995

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