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Risk-Profiling Defined Benefit Pension Schemes

Michael A.H Dempster, Matteo Germano, Elena A Medova, James K Murphy, Dermot Ryan and Francesco Sandrini
The Journal of Portfolio Management Summer 2009, 35 (4) 76-93; DOI: https://doi.org/10.3905/JPM.2009.35.4.076
Michael A.H Dempster
is a professor emeritus and the founder of the Centre for Financial Research, Statistical Laboratory, University of Cambridge, and a managing director of Cambridge Systems Associates Ltd., in Cambridge, U.K.
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  • For correspondence: mahd2@cam.ac.uk
Matteo Germano
is head of Global Investment Solutions at Pioneer Investments SA in Milan, Italy.
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  • For correspondence: matteo.germano@pioneerinvestments.com
Elena A Medova
is a senior research associate at the Judge Business School, University of Cambridge, and a managing director of Cambridge Systems Associates Ltd., in Cambridge, U.K.
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  • For correspondence: eam28@cam.ac.uk
James K Murphy
is a senior analyst at Cambridge Systems Associates Ltd. and a doctoral student at the Centre for Financial Research, University of Cambridge, in Cambridge, U.K.
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  • For correspondence: james.murphy@cambridge-systems.com
Dermot Ryan
is an institutional portfolio manager at Pioneer Investments in Dublin, Ireland.
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  • For correspondence: dermot.ryan@pioneerinvestments.com
Francesco Sandrini
is head of Institutional Portfolio Managers at Pioneer Investments in Munich, Germany.
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  • For correspondence: francesco.sandrini@pioneerinvestments.com
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Abstract

A dynamic stochastic optimization model of strategic assetliability management is useful in advising underfunded defined benefit pension schemes on best practice for returning to solvency and long-term stability. The authors present an overview of the dynamic stochastic programming techniques involved and briefly describe the nature of Pioneer Investment's proprietary CASM simulator from which the asset class returns and pension scheme liabilities are generated. The stochastic optimization model is described precisely in the article as well as its solution using linear programming. To illustrate the approach, the authors offer two examples of defined benefit schemes using simple, conservative, fund liability models.The optimal dynamic asset allocations of the two examples reflect the motivation of second generation liability-driven investment schemes.Although the final salary scheme models are simple, more complex models can be incorporated with little extra effort into the system described by the authors.Most actuarial assessments used in practice can be modeled for this purpose.

TOPICS: Pension funds, financial crises and financial market history, volatility measures

  • © 2009 Institutional Investor, Inc.
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The Journal of Portfolio Management: 35 (4)
The Journal of Portfolio Management
Vol. 35, Issue 4
Summer 2009
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Risk-Profiling Defined Benefit Pension Schemes
Michael A.H Dempster, Matteo Germano, Elena A Medova, James K Murphy, Dermot Ryan, Francesco Sandrini
The Journal of Portfolio Management Jul 2009, 35 (4) 76-93; DOI: 10.3905/JPM.2009.35.4.076

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Risk-Profiling Defined Benefit Pension Schemes
Michael A.H Dempster, Matteo Germano, Elena A Medova, James K Murphy, Dermot Ryan, Francesco Sandrini
The Journal of Portfolio Management Jul 2009, 35 (4) 76-93; DOI: 10.3905/JPM.2009.35.4.076
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  • Article
    • Abstract
    • OVERVIEW OF DYNAMIC STOCHASTIC PROGRAMMING
    • ASSET RETURN SIMULATION
    • CASM
    • MODELING LIABILITIES
    • OPTIMIZATION PROBLEM
    • EXAMPLES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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