Pension Funds: Investment Risk Management
In the article the necessity of the pension system reform was proved. The basic types of pension plans non-governmental pension provision were described. The pension plan which is the most suitable for the modern condition of the Ukrainian pension system was defined. The risks associated with the fu...
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Parfonova, L.G. Bikinina, A.O. 2017-09-03T19:20:00Z 2017-09-03T19:20:00Z 2013 Pension Funds: Investment Risk Management / L.G. Parfonova, A.O. Bikinina // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 86–90. — Бібліогр.: 15 назв. — англ. 1817-3772 https://nasplib.isofts.kiev.ua/handle/123456789/123389 [331.25:347.464](477) In the article the necessity of the pension system reform was proved. The basic types of pension plans non-governmental pension provision were described. The pension plan which is the most suitable for the modern condition of the Ukrainian pension system was defined. The risks associated with the functioning of the pension system were classified. The main methods of risk management were suggested. У статті обґрунтовано необхідність реформування вітчизняної пенсійної системи. Описано основні види пенсійних планів недержавного пенсійного забезпечення. Визначено пенсійний план, який найбільше підходить для сучасного стану пенсійної системи України. Наведено класифікацію ризиків, пов’язаних з функціонуванням пенсійної системи. Запропоновано основні методи управління ризиками. В статье обоснована необходимость реформирования отечественной пенсионной системы. Описаны основные виды пенсионных планов негосударственного пенсионного обеспечения. Определен пенсионный план, наиболее подходящий для современного состояния пенсионной системы Украины. Приведена классификация рисков, связанных с функционированием пенсионной системы. Предложены основные методы управления рисками. en Інститут економіки промисловості НАН України Економічний вісник Донбасу Finance Pension Funds: Investment Risk Management Пенсійні фонди: управління інвестиційним ризиком Пенсионные фонды: управление инвестиционным риском Article published earlier |
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Digital Library of Periodicals of National Academy of Sciences of Ukraine |
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Pension Funds: Investment Risk Management |
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Pension Funds: Investment Risk Management Parfonova, L.G. Bikinina, A.O. Finance |
| title_short |
Pension Funds: Investment Risk Management |
| title_full |
Pension Funds: Investment Risk Management |
| title_fullStr |
Pension Funds: Investment Risk Management |
| title_full_unstemmed |
Pension Funds: Investment Risk Management |
| title_sort |
pension funds: investment risk management |
| author |
Parfonova, L.G. Bikinina, A.O. |
| author_facet |
Parfonova, L.G. Bikinina, A.O. |
| topic |
Finance |
| topic_facet |
Finance |
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2013 |
| language |
English |
| container_title |
Економічний вісник Донбасу |
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Інститут економіки промисловості НАН України |
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Article |
| title_alt |
Пенсійні фонди: управління інвестиційним ризиком Пенсионные фонды: управление инвестиционным риском |
| description |
In the article the necessity of the pension system reform was proved. The basic types of pension plans non-governmental pension provision were described. The pension plan which is the most suitable for the modern condition of the Ukrainian pension system was defined. The risks associated with the functioning of the pension system were classified. The main methods of risk management were suggested.
У статті обґрунтовано необхідність реформування вітчизняної пенсійної системи. Описано основні види пенсійних планів недержавного пенсійного забезпечення. Визначено пенсійний план, який найбільше підходить для сучасного стану пенсійної системи України. Наведено класифікацію ризиків, пов’язаних з функціонуванням пенсійної системи. Запропоновано основні методи управління ризиками.
В статье обоснована необходимость реформирования отечественной пенсионной системы. Описаны основные виды пенсионных планов негосударственного пенсионного обеспечения. Определен пенсионный план, наиболее подходящий для современного состояния пенсионной системы Украины. Приведена классификация рисков, связанных с функционированием пенсионной системы. Предложены основные методы управления рисками.
|
| issn |
1817-3772 |
| url |
https://nasplib.isofts.kiev.ua/handle/123456789/123389 |
| citation_txt |
Pension Funds: Investment Risk Management / L.G. Parfonova, A.O. Bikinina // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 86–90. — Бібліогр.: 15 назв. — англ. |
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2025-11-24T18:45:23Z |
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2025-11-24T18:45:23Z |
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| fulltext |
86
Економічний вісник Донбасу № 4 (34), 2013
UDC [331.25:347.464](477)
L. G. Parfonova,
Senior lecturer of the Department of
International Business Activity
A. O. Bikinina,
Donetsk National Technical University
PENSION FUNDS: INVESTMENT RISK MANAGEMENT
Introduction. Pension provision has always been
an important issue for every government as it contributes
to the economic image of the country in general and
impacts on the population’s trust to government. One of
the most important tasks of social-oriented market
economy development in Ukraine is pension system
reform. Because of the new economic, social, political
and demographical realties, our country has an objective
need to implement a system of non-state pension
provision, which is actually one of the foreground
directions of social security system development. The
current most serious concern is the extraordinarily large
public pension expenditures (approximating to 16% of
GDP), which is almost twice as large as the average
public pension expenditures in EU countries. The process
of population ageing and an increase of pension age
citizen's share amplify the social and financial pressure
on the working population of the country and becomes a
reason for the heightened attention of society towards
non-state pension funds system development.
Since independence, Ukraine has undertaken very
minimal reforms of the social sector. The State Pension
Fund was the fundamental of Ukrainian pension system.
The main source of retirement income is provided by
state solidarity pension insurance system financed on a
pay-as you go basis. Private (non-state) pension funds
have been implemented and legislated since 2004, when
the law “On Mandatory State Pension Insurance” was
adopted, and have formed the third pillar of Ukrainian
pension system. Nevertheless, they still have not gained
the popularity in Ukraine, unlike in other European
countries. Moreover, there is a slight reduction in their
activity. At the end of the 2012 there are 94 non-state
pension funds that are functioning in Ukraine, but none
of them tends to be stable and developing. The situation
is considerably different in other countries. The most of
private pension funds have proved to be effective and
secure despite all the risk that is undertaken.
The analysis of scientific researches. A variety
of problems connected with state and non-state pension
funds effectiveness is a topic for discussion for foreign
scientists and series of researches are devoted to risks
of pension system. For example, Dorothee Franzen
examines investment risks in defined-benefit pension
funds [1]; Sandy Halim, Terrie Miller, and David Dupont
held a global survey on how pension funds manage
investment risk [2] and so on.
The reforms of pension system and pension
provision in general is the question which is becoming
more and more topical in Ukraine, especially due to the
pension reform recently implemented. For those reasons,
the number of Ukrainian researches devoted to this topic
is rapidly growing. So, A. Bakhmach in the research pays
attention to the non-state pension provision system
development in Ukraine [3]. T. Salnikova analyses the
reliability of private pension [4]. P. Floreskul underlines
the importance of non-state pension provision in social
security of Ukrainian citizens [5]. A. Kazanchan examines
and researches pension provision and its connection with
pension insurance [6]. N. Telichko and G. Kuzmenko
analyse the influence of non-state pension funds at social-
economic development of the country [7]. V. Pavliv in
his research describes the current state of non-state
pension provision system and underlines difficulties and
problems of its development [8]. Tolubyak V. proposes
the new classification of risks which pension providing
system undertakes [9]. However, the question of different
kind of pension system’s risks which one can face is not
well considered in Ukrainian scientific literature.
Pension system attracts big volumes of financial
resources and contains numerous risks. That is why the
government policy in this sphere has to be directed at
using special approaches and methods of defining pension
system’s risks and adequate reaction at their negative
demonstration. Thereby the main goal of this paper is
to make profound and complex research existing and
potential risks of pension system in order to define the
ways of overcoming their negative effects.
The research. In conditions of market economy,
social insurance is the main institution of person’s security
and pension provision is a basic and one of the most
important social guarantee of stable development of the
society, as it directly affects interests almost of all the
people. During the recent decades, the current system
of state pension provision, based on the redistribution
principle, has faced the disability of providing their
participants with the decent level of pensions, due to the
demographical changes in the population structure which
are connected with increase of the pensioners’ share and
decrease of the number of employable population.
L. G. Parfonova, A. O. Bikinina
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Економічний вісник Донбасу № 4 (34), 2013
To improve the situation, there are certain measures
to be taken. The current state of pension system requires
the implementation of new types and models of pension
provision in Ukraine, based on the experience of highly-
developed countries.
First of all, the implementation of new pension plans
is essential. In broad terms, and depending on how pension
benefits are calculated and who bears the inherent risk,
pension plans can either be defined benefit (DB) or defined
contribution (DC) in nature. Defined benefit plans are
plans where the employer guarantees to pay the employee
at retirement a fixed monthly income for life. Defined
contribution plans are plans in which the employer agrees
to contribute a fixed amount to the employee's pension
fund each year in which the employee is employed. The
income that the employee receives during retirement
depends upon how much money the plan accumulated
and how much income that amount can generate. Under
both types of plans, funding of the pension can be in the
form of contributions made by the employer alone or by
contributions from both the employer and employee.
The defined-contribution pension scheme is a
private pension plan which is gaining popularity in a wide
range of countries, in which private pension provision is
a main source of retirement income for pensioners. The
number of private funds which provide members with
such type of scheme is rapidly growing, meanwhile in
Ukraine, not only this type of scheme is not developed,
but also the number of pension funds and private pension
contracts has recently faced a dramatic fall. However,
the main indicators of non-state pension funds activity
are positive, which proves that this system has potential
and can be developed and effective in the future.
Defined contribution pension plan has a fixed
contribution usually based as a percentage of the
employees’ salary (usually employer matched). The
benefit is dependent on how the portfolio performs with
no guarantees as to how much income you’ll receive
during retirement. For the astute investor, a defined
contribution plan has the benefit of total control over the
money/portfolio. The investor can choose various funds
and asset allocation within the plan.
Typically speaking, an employee doesn’t have a
choice as to whether to enroll in a defined benefit plan or
a defined contribution plan. It’s usually one or the other
depending on the company. Defined contribution plans
are becoming more popular as they are much less risk to
the company and arguably the employee as well.
Ukrainian pension system should implement changes
to adopt the social insurance principles of the Notional
Defined Contribution (NDC) type PAYG schemes.
The implementation of DC pension scheme can have a
range of advantages both for the retirees and Ukrainian
economy. Government rarely invests pension contributions,
so basically people pay taxes to make pension contributions,
but, this money are rarely invested. Instead government
pays pension payments out of current expenditure. This
means with an ageing population, they will struggle to pay
the pension commitments. What is more, the most of private
pensions around the world enable the government to lower
taxes. Arguably lower income tax may increase incentives
to work. Lower corporation tax may increase incentives
for business investment, so this point can be implemented
into Ukrainian system as well.
Moreover, the support ratio in Ukrainian as well as
in all the other countries is declining. A real problem the
government faces is that the percentage of people of
retirement age is increasing. This means an increase in
the dependency ratio. Basically, there will be more people
receiving pension compared to the number of people
working and paying income tax (Fig.1). This is going to
leave a black hole in government finances, relying on
private pensions would avoid this problem.
Besides the support ration, we can see the unstable
and insignificant and unstable growth of the replacement
rate, which indicates the ratio of the pension itself to the
pre-retirement salary (Fig.2). Replacement rate is one of
the main indicators of pension system effectiveness, so
according to the recent data, Ukrainian pension system
is not as effective as it could be, that is also a reason for
its reformation.
So, there are four desirable features of the DC:
1. The pension income entitlements are based on
average ‘lifetime’ wages, rather than a subset of best or
final years’ wages;
2. Benefits are adjusted for early or deferred
retirement on the basis of actuarial fairness;
3. Benefits are adjusted as life expectancy increases,
L. G. Parfonova, A. O. Bikinina
Table 1
The dynamics of the non-state pension funds activity main indicators [10]
2010 2011 2012
The number of pension contracts,
thousands unites
69,7 75,0 61,4
Pension benefits, mln uah 158,2 208,9 251,9
Profit from assets investments, mln uah 433,0 559,9 620,3
88
Економічний вісник Донбасу № 4 (34), 2013
so as to reflect the longer duration for which benefits
would be paid; and
4. The recognition of periods outside employment
(such as unemployment, periods of maternity and parental
leave) is achieved by crediting notional personal accounts
with additional contributions paid from general public
revenues on annual basis.
But at the same time it has the downside:
1. Retirement income is entirely dependent on how
the portfolio/market performs over the vested period.
2. Even an employee who has no interested in
finances needs to be involved with the portfolio.
As well as being advantageous, DC private
pension system undertakes a range of risks. In DC plans,
participants bear the brunt of risk, while in traditional DB
plans sponsoring employers assume most of the risks.
Employers in some countries have introduced hybrid and
mixed DB plans, which come in different forms, but
effectively involve some degree of risk sharing between
employers and employees.
According to V. Tolubyak, non-state pension funds
face the political, financial, demographical, market,
systematic, investment risks and also the risk of distrust
[9]. Among Western pension funds, the investment risk
proves to be the most considerable and dangerous.
Risks undertaken by private pension system may
also be classified as following:
• social and labour-market risks – different life
events – such as persistent low earnings, long-term
unemployment, caring for children or older relatives,
family problems that affect professional sphere, illnesses
and problems with health - can have a negative results
on the retirement income of the worker. In other words,
the employee may not be capable of making contributions
because of the personal reasons. The cost of these risks
could be borne by individuals, by governments or by the
contributors to pension systems.
• policy risk – political situation in the country
can change dramatically and different changes, such as
new laws or legislative acts may in unanticipated changes
in pension entitlements before or during retirement,
perhaps leaving individuals with little or no time to
respond by changing their labour-market or savings
decisions;
L. G. Parfonova, A. O. Bikinina
27%
28%
29%
30%
31%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fig. 2. The dynamics of the replacement rate in Ukraine [12]
0%
10%
20%
30%
40%
50%
60%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Fig. 1. The growth of the number of pensioners in the total population of Ukraine [11]
89
Економічний вісник Донбасу № 4 (34), 2013
• myopia risk - many workers don’t think much
about their future and don't pay enough attention to saving
money for later, especially for retirement. They prefer to
consume more right now. This would lead to low pensions
and costs for taxpayers and contributors if these retirees
were entitled to safety-net benefits [13];
• life-expectancy or longevity risk – despite the
fact that recent increase in life expectancy may be
celebrated as one of achievements of modern society,
not all pension systems are able to ensure to ensure long-
term affordability. Moreover, it is much less clear how
the burden of such adjustments should be divided between
today’s taxpayers, contributors and retirees and future
retirees. Furthermore, the estimates of life-expectancy
increases on which pension decisions have been based
have, regrettably, often turned out to be wrong. The
growth of life expectancy, especially at retirement age,
has consistently been underestimated [14];
• investment risk – the risk that the return is not
produced due to unexpected behavior of the investments.
Both internal and external factors may cause assets to
not behave as expected. So, generally, investment risk
may be divided into two groups: external and internal
influences.
Despite the fact that it is difficult to manage such
risks as longevity or policy ones, pension funds
successfully manage the investment risk, using the wide
range of methods. The most popular of them are
regulation of investments in pension funds, establishment
of surplus funds, diversification and asset allocation
reviews.
Regulation of investments in pension funds
(establishment of limits on investments) is the method
which is used in the most countries. It basically means
that there are certain limits on investments in some
particular sphere, which regulated by law or by pension
fund itself.
Establishment of surplus funds is a key method to
protect participants’ money. They are formed of the
money left after all the liabilities, taxes and fixed payments.
Surplus funds play a role of some kind of insurance for
the case of emergency. In case when the pension fund
faces the risk and can bear it, the benefits are paid to
participants from surplus fund.
Diversification is also one of the most important
methods. It’s a worldwide known risk management
technique that mixes a wide variety of investments within
a portfolio. In that case, pension funds are protecting
themselves from big losses in one particular form of
investments and therefore are reducing the risk in general.
It is the method used the most widely around the world.
Figure 3 shows the asset allocation of the largest pension
system funds’.
Finally, it is essential to review asset allocation in
order to monitor its effectiveness and to define whether
the assets behave as expected.
Conclusion. Non-state pension funds play an
important role in the system of pension provision.
Defined-contribution pension scheme is the most popular
and developed type of private pension provision and
Ukraine has a great potential to implement this type of
pension plan. The first steps have already been made as
we can see a slight increase in the number of private
pension funds and growing amount of pension benefits.
Despite the fact, that private pension provision system is
affected by various risks, we can see from the foreign
countries’ experience that they are manageable, even
though there are certain losses to be taken. The most
successfully foreign pension funds manage investment
risks, using such methods as diversification, surplus funds
L. G. Parfonova, A. O. Bikinina
Fig. 3. Pension funds’ asset allocation in 2011 (% of total investment) [15]
0,0
10,0
20,0
30,0
40,0
50,0
60,0
Canada Germany Italy Japan Netherlands United States Ukraine
Bills and bonds Mutual funds (CIS) Other investments
Shares and Loans Land and Buildings Cash and Deposits
90
Економічний вісник Донбасу № 4 (34), 2013
establishment, regulation of investments and asset
allocation review. The development of private pension
funds as institutional investors, which can optimize the
Ukrainian pension system functioning is the topic for
further research.
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Парфьонова Л. Г., Бікініна Г. О. Пенсійні
фонди: управління інвестиційним ризиком
У статті обґрунтовано необхідність реформуван-
ня вітчизняної пенсійної системи. Описано основні
види пенсійних планів недержавного пенсійного за-
безпечення. Визначено пенсійний план, який найбіль-
ше підходить для сучасного стану пенсійної системи
України. Наведено класифікацію ризиків, пов’язаних
з функціонуванням пенсійної системи. Запропонова-
но основні методи управління ризиками.
Ключові слова: пенсійна система, недержавні
пенсійні фонди, інвестиційний ризик, управління ри-
зиками.
Парфенова Л. Г., Бикинина А. А. Пенсион-
ные фонды: управление инвестиционным риском
В статье обоснована необходимость реформиро-
вания отечественной пенсионной системы. Описаны
основные виды пенсионных планов негосударствен-
ного пенсионного обеспечения. Определен пенсион-
ный план, наиболее подходящий для современного со-
стояния пенсионной системы Украины. Приведена
классификация рисков, связанных с функционирова-
нием пенсионной системы. Предложены основные
методы управления рисками.
Ключевые слова: пенсионная система, негосудар-
ственные пенсионные фонды, инвестиционный риск,
управление рисками.
Parfonova L. G., Bikinina A. O. Pension Funds:
Investment Risk Management
In the article the necessity of the pension system
reform was proved. The basic types of pension plans
non-governmental pension provision were described. The
pension plan which is the most suitable for the modern
condition of the Ukrainian pension system was defined.
The risks associated with the functioning of the pension
system were classified. The main methods of risk
management were suggested.
Key words: pension system, non-state pension funds,
investment risk, risk management.
Received by the editors: 04.11.2013
and final form 04.12.2013
L. G. Parfonova, A. O. Bikinina
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