Discussion Paper WP1903

Abstract  
We examine the determinants of firms’ defined pension plan de-risking strategy choices, and their impact on firm risk using a unique dataset covering FTSE 100 firms for the period 2009-2017.  In particular, we investigate which firm financial and pension fund characteristics influence de-risking strategy choices and their impact on firm risk, proxied with earnings and return volatility, default and credit risk.  Results show that de-risking strategies are more likely to be implemented when pensions have a longer investment horizon, indicating a higher level risk exposure due to investment uncertainty.  We find that firms with larger pension plans prefer innovative de-risking strategies (buy-in/buy-out and longevity swap), as these reduce the risk more effectively removing various pension fund risk altogether, over the traditional ones (soft and hard freezing).  Firms with higher market capitalisation and that are financially unconstrained implement innovative pension de-risking strategies as they have the ability to pay the cash premiums required.  We also find that pension de-risking strategies reduce firm risk.  Hard freezing and pension buy-ins/buy-outs have the most significant impact in reducing firm risk.  In contrast, soft freezing nd longevity swaps tend to have a weaker or no impact on the overall firm risk.
Keywords
Pension De-Risking Strategy, Defined-Benefit Pension Plans, Pension Freezing, Pensing Buy-in, Pension Buy-out, Longevity Swap.

Discussion Paper WP1902

 
Abstract
The paper examines the cointegration between pension assets and economic growth in the presence of structural breaks in 1995 and 1999. The structural breaks are endogenously determined. This paper gives an extensive literature review of the theoretical and empirical framework of pension fund reform in relation to growth. The literature shows pension fund reform has been encouraged with some emerging market economies including South Africa shifting from Pay As You Go (PAYG) to Fully Funded Schemes (FFS). The Zivot Andrews and modified ADF unit root test are used, and empirical evidence suggests no evidence of a unit root. This paper examines the cointegration between pension assets and economic growth in the presence of structural breaks. We find that pension assets have a positive but minimal impact on growth in the presence of structural breaks. The direction of the results is similar for the model with or without structural breaks. The results show that pension reform in South Africa has not contributed to a redistributive growth agenda despite the financial sector sophistication coupled with the strong institutional and regulatory framework.
Keywords
Pension Funds Reform, South Africa, structural breaks, PAYG to FFS, ARDL, Zivot Andrews  

Discussion Paper WP1901

Abstract

Persons who have achieved UK state pension age (SPA) may defer their pension and instead receive an extra pension on termination of deferral. We define a scheme to be actuarially fair to a category of deferrer with agreed discount rate, when the expected net present value of pre-tax lifetime receipts is independent of the deferral period. After a review of the literature on deferral and early take-up of state pensions in the UK and other countries, this paper argues that the current UK scheme based upon a uniform accrual rate cannot be actuarially fair. Instead, we propose a scheme where the accrual rate is dependent upon deferral period, gender, SPA, deferrer’s discount rate, degree of pension uprating, and partnership status of the deferrer. Fair accrual rate curves are plotted for various scenarios and compared with the current uniform rates of 10.4% and 5.8% per annum that apply to those who attain SPA before 6 April and after 5 April 2016 respectively. A scheme that is actuarially fair will not be cost neutral to the Exchequer unless the discount rate is the same for both parties. In addition to this asymmetry, adverse selection will impact upon both actuarial fairness and cost to the Exchequer. Expressions are derived for the cost penalty to the Exchequer for attempting to achieve actuarial fairness both with and without an acknowledgement of adverse selection. Similarly, when the objective is to achieve cost neutrality for the Exchequer, expressions for the cost to the deferrer are obtained. Some numerical examples are given for various scenarios. The methodology should be applicable to public pensions in other countries, in order to inform fair policies for both early and postponed take-up of pensions.

Keywords
UK State pension, deferral, actuarial fairness, cost neutrality, adverse selection, discount rate