Investment Issues

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 22: June 15, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Investment Issues
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T A B L E O F C O N T E N T S

"Do the Fiduciary Duties of Pension Funds Hinder Socially
Responsible Investment?"
BENJAMIN J. RICHARDSON
York University - Osgoode Hall Law School

"Investment Patterns in Singapore's Central Provident Fund
System"
BENEDICT S. KOH
Singapore Management University - School of Business
OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk Management
Department, National Bureau of Economic Research (NBER)
TOTO TANUWIDJAJA
Singapore Management University
JOELLE FONG
University of Pennsylvania - Insurance & Risk Management
Department

"Do Higher Stock Returns Really Lower Funding Costs for DB
Pension Plans? Some Simple, but Unpleasant Math"
NORMAN EHRENTREICH
RiverSource Investments, LLC, Martin Luther Universitat
Halle Wittenberg - Department of Banking and Finance

"Optimal Management and Inflation Protection for Defined
Contribution Pension Plans"
AIHUA ZHANG
Fraunhofer Gesellschaft - Department of Finance
CHRISTIAN-OLIVIER EWALD
University of St. Andrews - School of Economics and
Finance
RALF KORN
University of Kaiserslautern - Department of Mathematics

"Perspectives: The Case Against Stock in Public Pension Funds"
LAWRENCE N. BADER
Independent
JEREMY GOLD
Jeremy Gold Pensions

"Longevity Annuity: An Annuity for Everyone?"
JASON S. SCOTT
Financial Engines, Inc.
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"Do the Fiduciary Duties of Pension Funds Hinder Socially
Responsible Investment?"
Banking and Finance Law Review, Forthcoming

Contact: BENJAMIN J. RICHARDSON
York University - Osgoode Hall Law School
Email: brichardson@osgoode.yorku.ca
Auth-Page: http://ssrn.com/author=344572

Full Text: http://ssrn.com/abstract=970236

ABSTRACT: In recent years, pension funds and other institutional
investors have begun to give more attention to the environmental
and social behaviour of the companies in which they invest. A
recent movement for socially responsible investment (SRI) seeks
to exclude companies that pollute or ignore human rights, for
example, and to champion those that behave ethically and
responsibly. However, some confusion among investment
decisionmakers persists about the extent to which their fiduciary
duties to beneficiaries allow policies that may sacrifice
financial returns for environmental or other philanthropic
causes. This is compounded by the belief that they cannot secure
the best returns in respect of their fiduciary obligations with
current socially responsible companies. With reference to the
main common law jurisdictions, this article critically examines
whether the fiduciary duties of pension fund investors hinder
SRI. Contrary to some commonly held beliefs, SRI can often sit
comfortably with fiduciary duties to invest prudently. However,
legal reforms to improve the climate for SRI would help, as
evident by some recent initiatives in several jurisdictions.
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"Investment Patterns in Singapore's Central Provident Fund
System"
Pension Research Council WP2006-12

Contact: BENEDICT S. KOH
Singapore Management University - School of
Business
Email: skkoh@smu.edu.sg
Auth-Page: http://ssrn.com/author=431589

Co-Author: OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk
Management Department, National Bureau of Economic
Research (NBER)
Email: mitchelo@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=41556

Co-Author: TOTO TANUWIDJAJA
Singapore Management University
Email: toto.t.2005@maf.smu.edu.sg
Auth-Page: http://ssrn.com/author=684486

Co-Author: JOELLE FONG
University of Pennsylvania - Insurance & Risk
Management Department
Email: joellefongj@gmail.com
Auth-Page: http://ssrn.com/author=824427

Full Text: http://ssrn.com/abstract=933332

ABSTRACT: Rising elderly life expectancies imply the need to
accumulate sufficient savings for retirement. This paper
investigates the role of recent changes in the investment menu in
helping workers grow their saving in the Singaporean Central
Provident Fund (CPF) system. Our research explores the investment
patterns of CPF participants and articulates their implications
for policymakers. We find that most investors use their money for
housing purchase and default the remainder to the CPF investment
pool. The bulk of non-housing saving sits uninvested in bank
accounts paying a low return. A fraction of workers does elect
outside investment products, with high-income earners and males
tending to take more risk than low-income earners and females.
Since workers who default their money to the CPF fund receive a
guaranteed 2.5% return on the Ordinary Account and 4% on the
Special Account, hurdle rates for money market and equity funds
are substantial. These high hurdle rates help explain why few CPF
account holders invest outside the default government investment
pool, though inertia probably explains why many employees let
their funds sit in bank accounts earning low interest rates.
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"Do Higher Stock Returns Really Lower Funding Costs for DB
Pension Plans? Some Simple, but Unpleasant Math"

Contact: NORMAN EHRENTREICH
RiverSource Investments, LLC, Martin Luther
Universitat Halle Wittenberg - Department of
Banking and Finance
Email: Norman.X.Ehrentreich@ampf.com
Auth-Page: http://ssrn.com/author=333272

Full Text: http://ssrn.com/abstract=970059

ABSTRACT: This paper shows that it is possible for a defined
benefit pension plan following an immunized fixed income strategy
to have lower long-term funding costs than a pension plan
following an equity-based investment strategy. This may be
possible even if stocks outperform bonds over the relevant time
horizon. Current liability payments for an under funded plan
raise the required investment hurdle rate needed to maintain a
constant funding level. Therefore, under funded pension plans
betting on equities need to earn higher asset returns than
immunized pension plans at higher funding levels to not further
fall behind. Since funding gaps for equity-based investment
strategies usually arise under unfavorable business conditions,
companies may be unable or unwilling to immediately close them.
This leads to a persistence of under funding, thus causing above
average returns during a stock market recovery to accrue to an
insufficient asset base. Every time an equity-based pension plan
finds itself under funded, its potential for lower long-term
funding costs over bond strategies is diminished. Lower long-term
funding costs due to higher stock market returns can only be
assumed if plan sponsors close arising funding gaps as soon as
possible. It is furthermore argued that current and upcoming
pension regulations as well as investment practices tends to
shift the distribution of funding levels towards under funding.
Therefore, it is likely that the theoretical possibility of
higher funding costs for equity based investment strategies has
too often materialized and is partly to blame for the recent
shift away from DB to defined contribution plans.
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"Optimal Management and Inflation Protection for Defined
Contribution Pension Plans"

Contact: AIHUA ZHANG
Fraunhofer Gesellschaft - Department of Finance
Email: aihua.zhang@itwm.fraunhofer.de
Auth-Page: http://ssrn.com/author=786402

Co-Author: CHRISTIAN-OLIVIER EWALD
University of St. Andrews - School of Economics and
Finance
Email: ewald@maths.leeds.ac.uk
Auth-Page: http://ssrn.com/author=548390

Co-Author: RALF KORN
University of Kaiserslautern - Department of
Mathematics
Email: korn@mathematik.uni-kl.de
Auth-Page: http://ssrn.com/author=90876

Full Text: http://ssrn.com/abstract=976594

ABSTRACT: Due to the increasing risk of inflation and diminishing
pension benefits, insurance companies have started selling
inflation-linked products. Selling such products the insurance
company takes over some or all of the inflation risk from their
customers. On the other side financial derivatives which are
linked to inflation such as inflation linked bonds are traded on
financial markets and appear to be of increasing popularity. The
insurance company can use these products to hedge its own
inflation risk. In this article we study how to optimally manage
a pension fund taking positions in a money market account, a
stock and an inflation linked bond, while financing investments
through a continuous stochastic income stream such as the plan
member's contributions. We use the martingale method in order to
compute an analytic expression for the optimal strategy and
express it in terms of observable market variables.
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"Perspectives: The Case Against Stock in Public Pension Funds"
Financial Analysts Journal, Vol. 63, No. 1, pp. 55-62,
January/February 2007

Author: LAWRENCE N. BADER
Independent
Email: larrybader@aol.com
Auth-Page: http://ssrn.com/author=381805

Co-Author: JEREMY GOLD
Jeremy Gold Pensions
Email: jeremy-gold-wp00@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=333128

Abstract: http://ssrn.com/abstract=960555

ABSTRACT: The case against equity investment by U.S. corporate
pension funds has been well documented for a quarter century. The
public sector has ignored or dismissed that case because of
differences between taxation and accounting between the private
and public sectors, the differing interests of shareholders and
taxpayers, and the presumption that public plans last forever.
Despite these differences, shifting public pension fund
investments from equities to bonds adds value for local
taxpayers. It also minimizes the risks of intergenerational
taxpayer conflicts, undercharges to employees' compensation
packages for the value of the pensions, employee claims on
pension surplus, and higher governmental borrowing costs.
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"Longevity Annuity: An Annuity for Everyone?"

Contact: JASON S. SCOTT
Financial Engines, Inc.
Email: jscott@financialengines.com
Auth-Page: http://ssrn.com/author=666589

Full Text: http://ssrn.com/abstract=992423

ABSTRACT: As of 2005, individuals had an estimated $7.4 trillion
invested in IRAs and employer-sponsored retirement accounts.
Given these investments, many retirees will face the difficult
problem of turning a pool of assets into a stream of retirement
income. Purchasing an immediate annuity is a common
recommendation for retirees looking to maximize retirement
spending. However, the vast majority of retirees are unwilling to
annuitize all of their assets. This paper demonstrates that a new
type of annuity, a longevity annuity, is optimal for retirees
unwilling to fully annuitize. For a typical retiree, allocating
10%-15% of wealth to a longevity annuity creates spending
benefits comparable to an immediate annuity allocation of 60% or
more.