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Optimal risk for pension funds: the sustainability of the UK Universities pension scheme

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  • Miles, David
  • Sefton, James

Abstract

We use stochastic simulations to analyse the probability distribution of outcomes for the UK University pension scheme (the USS) in the light of conflicting claims about its sustainability. We use the results to draw wider conclusions about the nature of defined benefit (DB) pension schemes and whether they bring benefits to members based on risk sharing. We find that a substantial investment in riskier assets (equities) makes the average outcome one in which the scheme is comfortably able to pay accrued benefits. But the risk of having far fewer funds than needed to pay existing pension promises is significant and the chances of large deficits is substantial. The ambiguity about how pension fund surpluses or deficits would be allocated between scheme members and the scheme sponsor (for the USS that is Universities) means that agreement on the optimal portfolio allocation for the scheme's funds is not likely. Among scheme members of different ages and different attitudes towards risk agreement on what are acceptable trade-offs between risk and return on assets is unlikely. We contrast this with the position for defined contribution pensions.

Suggested Citation

  • Miles, David & Sefton, James, 2024. "Optimal risk for pension funds: the sustainability of the UK Universities pension scheme," CEPR Discussion Papers 19254, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:19254
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    More about this item

    Keywords

    Pensions;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G50 - Financial Economics - - Household Finance - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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