Preface and Acknowledgments .................................... xi
Abbreviations .................................................. xv
Chapter 1
Evaluating the Financial Performance of Pension Funds ........... 1
Heinz P. Rudolph, Richard Hinz, Pablo Antolin, and Juan
Yermo
Background and Motivation for the Research Program .............. 1
The Importance of Appropriate Measures of Performance ........... 3
Overview and Summary of the Book ................................ 7
Policy Implications of the Research Findings ................... 18
Notes .......................................................... 22
References ..................................................... 23
Chapter 2
Investment Performance of Privately Managed Pension Funds:
Overview of the Available Data ................................. 25
Pablo Antolin and Waldo Tapia
Description of Privately Managed Pension Funds around
the World ...................................................... 26
Additional Problems with the Data Reported on Investment
Returns ........................................................ 35
Preliminary Observations from the Initial Data Review .......... 35
Notes .......................................................... 36
References ..................................................... 37
Chapter 3
Financial Performance of Pension Funds: An Exploratory Study ... 39
Eduardo Walker and Augusto Iglesias
Introduction and Overview of Findings .......................... 39
Portfolio Performance Measurement .............................. 40
Required Data .................................................. 53
The Pension Fund Database ...................................... 56
Legal and Administrative Considerations ........................ 58
Results ........................................................ 60
Conclusions .................................................... 67
Annex: Country Performance Fact Sheets ......................... 69
Notes .......................................................... 94
References ..................................................... 94
Chapter 4
Portfolio Choice, Minimum Return Guarantees, and Competition
in Defined Contribution Pension Systems ........................ 97
Pablo Castañeda and Heinz P. Rudolph
A Model Economy ................................................ 99
Equilibrium Portfolios under Benchmarking Constraints ......... 103
Discussion .................................................... 107
Annex ......................................................... 108
Notes ......................................................... 115
References .................................................... 116
Chapter 5
Labor Market Uncertainty and Pension System Performance ....... 119
Olivia S. Mitchell and John A. Turner
Pension Structures and Human Capital Uncertainty .............. 120
Interactions between Human Capital Uncertainty and Pension
Performance ................................................... 123
Integrating Human Capital Uncertainty into Models of Pension
Outcomes ...................................................... 131
Benchmarks for Pension Performance ............................ 139
Conclusions and Policy Implications ........................... 145
Notes ......................................................... 146
References .................................................... 151
Chapter 6
Pension Funds, Life-Cycle Asset Allocation, and Performance
Evaluation .................................................... 159
Fabio С. Bagliano, Carolina Fugazza, and Giovanna
Nicodano
Methodological Issues in Developing Optimal Portfolios That
Include Pension-Specific Parameters ........................... 163
Asset Allocation with Human Wealth ............................ 168
A Basic Life-Cycle Model ...................................... 172
Welfare Ratios for Performance Evaluation ..................... 191
Conclusions ................................................... 194
Notes ......................................................... 197
References .................................................... 198
Chapter 7
Application of Advances in Financial Theory and Evidence to
Pension Fund Design in Developing Economies ................... 203
Luis M. Viceira
Global Trends of DC Pension Systems ........................... 204
Policy Challenges of DC Pension Systems ....................... 205
Innovations in Pension Fund Design ............................ 207
Life-Cycle Investing .......................................... 209
Pension Fund Design in Developing Economies ................... 215
Performance Evaluation of Investment Options .................. 222
Concluding Remarks ............................................ 238
References .................................................... 239
Chapter 8
Future Directions in Measuring the Financial Performance of
Pension Funds: A Roundtable Discussion ........................ 243
Commentary by Keith Ambachtsheer .............................. 244
Commentary by Olivia Mitchell ................................. 251
Commentary by Luis Viceira .................................... 258
Commentary by Zvi Bodie ....................................... 264
Index ......................................................... 269
Figures
2.1 Total Assets and Asset Allocation, 2004 ................... 31
3.1 The Sharpe Ratio .......................................... 41
3.2 Sharpe Ratios of U.S. Stocks and Bonds, Five-Year
Rolling Estimates ......................................... 50
3.3 Short-Term Local Currency Sharpe Ratios ................... 65
3.4 Long-Term Local Currency Sharpe Ratios .................... 66
3.5 In-Sample Selection Returns ............................... 67
3.6 Out-of-Sample Selection Returns ........................... 68
5.1 Patterns of Earnings over the Lifetime, with Wage Level
Indicator: Excluding and Including Zero Earners .......... 125
5.2 Pension Contribution Patterns in Chile by Age:
Percentage of Available Years in Which Contributions
Were Made ................................................ 128
6.1 Labor Income Process ..................................... 178
6.2 Life-Cycle Profiles of Consumption, Income, and Wealth ... 179
6.3 Policy Functions: Sensitivity to Stocks .................. 180
6.4 Policy Functions: Sensitivity to Bonds ................... 180
6.5 Age Profiles of Optimal Stock and Bond Holdings
(Averages) ............................................... 182
6.6 Age Profiles of Optimal Stock and Bond Holdings,
Benchmark Case ........................................... 185
6.7 Age Profiles of Optimal Stock and Bond Holdings, High
Risk Aversion ............................................ 186
6.8 Age Profiles of Optimal Stock and Bond Holdings, Low
Replacement Ratio ........................................ 187
6.9 Age Profiles of Optimal Stock and Bond Holdings, High
Replacement Rate ......................................... 188
6.10 Age Profiles of Optimal Stock and Bond Holdings,
Decreasing Replacement Ratio ............................. 189
7.1 Balance Sheet of Typical Plan Participant ................ 209
7.2 Balance Sheet of Typical Plan Participant with a Safe
Job ...................................................... 210
7.3 Stylized Life-Cycle Asset Allocation ..................... 212
7.4 Realistically Calibrated Life-Cycle Portfolio
Allocation ............................................... 213
7.5 Correlations across International Equity Markets ......... 219
7.6 Estimated Live-Cycle Labor Earnings of Chilean Males ..... 223
7.7 Distribution of Labor Earnings in Final Working Year ..... 224
Tables
2.1 Privately Managed Pension Funds Included in This Study,
by Country and Form of Provision .......................... 27
2.2 Investment Regulations .................................... 29
2.3 Basic Statistical Information on Real Investment Returns
by Economy ................................................ 33
3.1 Performance Measures ...................................... 44
3.2 Example of Proper Calculations of Pension System
Returns ................................................... 54
3.3 General Description of the OECD Pension Fund Database ..... 57
3.4 Summary of Investment Regulations ......................... 59
5.1 How Human Capital Risks Translate into Pension Outcomes:
A Framework .............................................. 124
5.2 Life-Cycle Earnings Profiles Reported in U.S.
Microdata ................................................ 126
5.3 Examples of Pension Modeling Approaches .................. 132
5.4 Simulated Difference between a DC Account Balance and
a DB Lump-Sum Amount: Age 65 Retirees Arrayed by Tenure
Quintile (on Longest Job) and Lifetime Earnings
Quintile ................................................. 139
5.5 Sensitivity of Optimal DB Pension Replacement Rate to
Human Capital Risk ....................................... 140
6.1 Welfare Gains ............................................ 190
6.2 Welfare Ratios ........................................... 193
7.1 Portfolio Composition in Mandatory Pension Funds
(December 2007) .......................................... 215
7.2 Capital Markets Assumptions .............................. 226
7.3 Summary Table of Simulation Results ...................... 228
7.4 Simulation Results for Investment Strategies When Labor
Income Is Nonstochastic .................................. 230
7.5 Simulation Results for Investment Strategies When Labor
Income Is Stochastic and Uncorrelated with Stock
Returns .................................................. 232
7.6 Simulation Results for Investment Strategies When Labor
Income Is Stochastic and Correlated with Stock Returns ... 234
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