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Optimal long-term allocation with pension fund liabilities

The literature on how to optimally manage the investments of defined contribution funds is relatively scarce, despite the fact the growth in defined contribution continues to outpace defined benefit funds globally.

Now new research from academics at the University of Lausanne demonstrates how to perform an ALM study from a financial prospective for defined contribution plans.

The research finds that a liabilities hedging portfolio outperforms an assets-only strategy by between 5 and 15 per cent per year for the period between 1985 and 2013. This is due primarily to the fact that the optimal assets-only portfolio is typically long in cash, whereas hedging liabilities require the pension fund to be short in cash.

The authors conclude that: “This estimate suggests that allowing pension funds to hedge their liabilities through borrowing cash and investing in a diversified bond portfolio helps to enhance the global portfolio return.”

The article by Eric Jondeau and Michael Rockinger can be accessed below.

Optimal long-term allocation with pension fund liabilities