Building Long-Term Portfolio Benchmarks for Pension Funds in Emerging Economies
The movement from a defined benefit to a defined contribution pension system has important implications in the area of portfolio allocation. While the focus of defined benefit pension funds is essentially in the long term, some defined contribution...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/08/26662118/building-long-term-portfolio-benchmarks-pension-funds-emerging-economies http://hdl.handle.net/10986/24865 |
| Summary: | The movement from a defined benefit to a
defined contribution pension system has important
implications in the area of portfolio allocation. While the
focus of defined benefit pension funds is essentially in the
long term, some defined contribution funds might have
incentives to invest with shorter-term horizons. The case of
open pension funds, such as the ones in several countries in
Latin America and Central and Eastern European countries,
shows that competition on short-term returns may bring
pension funds into suboptimal portfolio strategies. As
policy makers become increasingly interested in finding
long-term sources of financing for infrastructure and other
long-term projects, it becomes essential to upgrade the
regulatory framework of open pension funds. This paper
contributes to the literature by proposing an investment
regulatory framework based on strategic asset allocation
that can be applicable to open pension funds. Based on the
use of lifecycle investment strategies, the paper proposes
the implementation of common portfolio benchmarks for
pension funds. Three elements are emphasized for
implementation of strategic asset allocation: (a) a
well-defined pension objective, (b) sound governance of the
portfolio benchmark, and (c) a methodology for developing
the benchmark. The paper proposes the use of the
approximation methodology as a starting point for designing
portfolio benchmarks, and illustrates step-by-step how to
build these long-term portfolios in a didactical way. |
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