Exam questions Flashcards
What are the 3 pillars of a pension system? Shortly explain all 3
governmental: pay as you go, redistribution fo funds, for everyone
occupational: funded based on previous pay and amount of working years
private: individuals own pension savings
What is a DB and a DC system? What are the main differences between the two systems? Name at least 3
DB and DC are pension systems.
In DB:
- employer bears the risk
- high costs for employer
- low flexibility for employees
- future pension pay is given
In DC:
- employee bears the risk
- lower costs for employer
- high flexibility for employees
- future pension pay dependent on market return
- employees make own decisions concerning pension investing
What are the main current challenges for pension funds? Mention at least three and briefly explain what the problem is
- longevity: people are getting older and the average age increases, therefore there are less working/young people who have to take financial care of retired/old people
- interest rates: market returns are low, not enough returns. low discount rate
- labor market: the proportions of working people on comparison to retirees
What is the role of the discount rate for pension funds? What differences exist between the discount rate calculation for US public pension funds and Dutch funds? Is this difference a problem? –> explain
Discount the future liabilities to a current value.
In US, rate based on expected rate of return. In NL, rate based on a given risk free rate
Yes, it creates a problem. Occurs in asset allocation.
In the US, pension funds adjust - match their risk taking and thereby their asset allocation based on the discount rate they need to decrease their funding gap.
Liabilities should be discounted by a (close to) risk-free rate as you know for sure that this needs to be paid out. / Pension liabilities should always be based on their ‘best estimate’ transaction value and you use interest rates for debt.
Describe the different steps a pension fund takes to arrive at a strategic asset allocation
Analyze the liabilities and the assets –> what is the duration of the obligations? What is the time horizon of my investment? How much risk can I take on?
Analyze the risk-return characteristics of the asset classes and the correlation between them.
Take into account the risk appetite of the pension fund and biases in the data (constraining optimizer).
Determine the mean-efficient/optimal portfolio by finding the optimal weights to each asset class
What are the 4 main findings of the paper by Campbell & Viceira (2005) “The term structure of the risk-return trade-off”?
the risk and correlation of the conventional asset classes changes over time.
stocks and bonds become less risky as the time horizon increases/due to mean reversion.
T-bills become riskier as the time horizon increases.
the optimal portfolio of an investor is dependent on the time horizon of his investment.
Mention 4 potential problems investors face with the data on alternative investments (Private Equity, Hedge Fund and Real Estate)
- survivorship bias
- selection bias
- smoothed data
- lagged data
Flammer (2013) and Krüger (2015) find different results for the impact of changes in ESG profiles on returns. Describe the results of both papers.
Flammer argues that positive environmental shocks result in positive stock returns and negative environmental shocks result in negative stock returns.
Krüger argues that generic positive and negative ESG shocks result in negative stock returns. Stock returns are only positively adjusted when the firm has previously shown poor ESG performance and now improves on this specific ESG aspect.
Thus, Krüger finds a positive effect only when ESG covers a past negative event (do no harm oriented) and Flammer finds a more linear oriented relation of environmental performance to stock performance.
Which circumstances boost the success rate of shareholder activism based on the article by Dimson et al.
According to Dimson et al., the probability of successful shareholder activism is increased by
1) inferior governance from a company perspective
2) socially conscious institutional shareholders
3) when a company has reputational concerns
4) when a company has higher capacity to implement changes
5) when activists collaborate
Name two ways in which Philips pension fund implements ESG considerations in their investment portfolio, as described in the guest lecture
Philips uses exclusion (irresponsible business and EU/UN sanctions) and engagement (based on global compact) to manage ESG considerations in their portfolio.
