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Economic capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme*

Published online by Cambridge University Press:  15 March 2012

BRUCE T PORTEOUS ,
PRADIP TAPADAR  and
WEI YANG
BRUCE T PORTEOUS
Affiliation:
School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, CT2 7NF, UK
PRADIP TAPADAR*
Affiliation:
School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, CT2 7NF, UK
WEI YANG
Affiliation:
School of Mathematics, Statistics and Actuarial Science, University of Kent, Canterbury, CT2 7NF, UK
*
(e-mail: P.Tapadar@kent.ac.uk)
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Abstract

This article considers the amount of economic capital that defined benefit (DB) pension schemes potentially need to cover the risks they are running. A real open scheme, the Universities Superannuation Scheme, is modelled and used to illustrate our results and, as expected, economic capital requirements are large. We discuss the appropriateness of these results and what they mean for the DB pension scheme industry and their sponsors. The article is particularly pertinent following the recent European Commission Green Paper on the future of European pensions systems, its call for advice on reviewing the Institutions for Occupational Retirement Provision Directive and the introduction of the Basel 2 and Solvency 2 risk-based regulatory regimes for banking and insurance, respectively.

Keywords

defined benefit pension schemeeconomic capitalsolvencystochastic modellingasset–liability management
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 11 , Issue 4 , October 2012 , pp. 471 - 499
Copyright
Copyright © Cambridge University Press 2012

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Footnotes

*

We are very grateful to David Stevenson, Paul Sweeting, Clare Bellis, Andrew James, Stephen Walker and Lothar Breuer for providing us with comments that have improved this article. We, the authors, nevertheless remain responsible for the content and accuracy of the article. The views expressed in the paper are our own and not those of our employers.

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