Investment strategies and risk management in pension funds
Title: Life-cycle product designs: Pro et contra
Participant: Henrik Ramlau-Hansen (FI, CBS)
Description: The traditional pension product with guaranteed benefits is in rapid decline in Denmark. Instead, more and more pension schemes are based on various life-cycle products, which are unit-linked type products, where the proportion of the savings invested in risky asset is high when young and declining with age towards retirement. The aim of the study is to analyze pro et con for the various versions of life-cycle products, in particular the extent to which they deliver a predictable pension with a limited downside risk. The current environment with ultra low interest rates poses a particular challenge.
Title: What’s the expected return on stocks over the next decade?
Participant: Jesper Rangvid (FI, CBS)
Description: I consider methods to forecast stock returns over longer horizons, such as ten years, and I evaluate which methods seem more promising. I present estimates of what we should expect stocks to return over the next decade. News is sad: Stock returns over the next decade are expected to be considerably lower than historical returns. I discuss implications for long-term investors, such as pension funds.
Title: Efficiently Inefficient Markets for Assets and Asset Management
Participants: Lasse H. Pedersen (FI, CBS) and Nicolae Garleanu (Berkeley)
Description: We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators."
Investors are small (retail investors) and large (institutional investors such as pension funds) and we analyze how their optimal strategies differ. Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.
Further, the paper has predictions for the future of capital markets and asset management. Indeed, the efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient.
Title: Obligatory Defined Contributions Schemes Over Life
Participants: Michael Møller and Niels Chr. Nielsen (FI, CBS)
Description: The general rule in Denmark is defined contribution schemes where the contribution as a percentage of salary is age independent. There are several arguments against this. The ability to pay into a pension scheme grows with age, as young people need to pay back study debts and have some free savings to obtain home ownership. With rising interest margins the problems for young people borrowing at the same time as saving in obligatory pensions schemes have grown. Furthermore, changing circumstances (lower interest rates) can lead to the necessity of raising pension savings, but the necessary rise may not be age independent.