Read Me - Society of Actuaries by fanzhongqing

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									The purpose of this file is to document papers, articles, newsletters and the
like available in digital form whose topic concerns pension finance or is
useful background to understanding pension finance, or economics from
the finance point of view. The abstract from the original, or where it had
a short synopsis, is provided to help the user choose appropriate readings.

It is hoped this material will serve to augment the Pension Actuary's
Guide to Financial Economics with additional material for study by those
with an interest in the field generally or its application to pension

The symposium tab is the list of papers presented at the Society of
"Great Controversy" symposium held in June, 2003 at Vancouver.

The General tab lists papers collected from various sources. They are listed
in order of publication date. In a few cases the papers are drafts with
circulation. Respect the rights of the author by limiting the use of these
personal education. The user can sort the records differently or search for
author, topic, etc. to locate material of interest.

The SOA Website tab is the list of articles available in the "Pension
Resources" area of the website. At the top of the worksheet is the direct
which can be used to jump directly to the Pension Finance Resources home
page. Or, if the link doesn't work, try copying the cell contents to your
address. Some of the papers are referenced under more than one topic.
SOA web links are duplicates to files listed under the Symposium or

Send comments, suggestions or corrections to:
Code   Description

AC     Accounting
AM     Assumptions/Methods
AS     Actuarial Standards
BE     Behavioral Economics
DE     Design
FE     Financial Economics
FF     Full Funding
IM     Immunization
IN     Investments
MF     Minimum Funding
MV     Market Value
PF     Pension Finance
RK     Risk
TR     Traditional DB view
         Title                  Author                            Publisher      Date                                   Filename                                 Print Size
                                                                                                                                                                 Pages Kbytes
1/n (The) Pension         Heath Windcliff    North American Actuarial Journal   Jul-04           14    511
Investment Puzzle         Phelim P. Boyle                                                 journal/2004/july/naaj0403_3.pdf

Accounting/Actuarial      Jeremy Gold        Pension Research Council           Nov-05              39    304
Bias Enables Equity                                                                       journal/2005/july/naaj0903-1.pdf
Investment by
Defined Benefit
Pension Plans
Actuaries discuss the     Jon Exley          The Actuary [US]                   Nov-03                   27   1470
principles of financial   Paul Gewirtz                                                    09/2003/november/act0311.pdf
economics of pension      Dimitry Mindlin
accounting                Mark Ruloff

Adding an Annuity to                         Watson Wyatt Worldwide             Jun-07    12    326
Improve Defiined                                                                          US-0070
Contribution Plan
Adequate Funding for Michael M. C. Sze       The Pension Forum Vol 9, No 1      Jun-96                         6    2340
a Pension Plan                                                                            forum/1996/june/pfn9606.pdf

Agency Problem                               Auburn University                  Jun-05                   2     41

An Actuary Looks at       Richard Q. Wendt   Risks and Rewards                  Feb-99                          2     513
Financial Insurance                                                                       rewards/1999/march/rrn9903.pdf
        Title                  Author                               Publisher                Date                                    Filename                            Print Size
                                                                                                                                                                         Pages Kbytes
Are Stocks "Too          Ron Muhlenkamp      Muhlenkamp & Company, Inc.                     Jul-94     2    21

Asset-Liability                              Society of Actuaries                           Aug-98           24    233
Professional Specialty                                                                                guides/professional-actuarial-specialty-
Guide                                                                                                 guides/1998/august/spg9808alm.pdf

Assumed Rates of       Jeremy Gold           Pension Research Council                       Sep-00                52    153
Discount for                                 Working Paper [Draft]
Valuations of Publicly
Sponsored Defined
Benefit Plans

Behavioral Economics Sendhil                 International Encyclopedia of the Social and   Nov-01               12    133
                     Mullainathan,           Behavioral Sciences
                     Richard H. Thaler

Behavioral Finance       Douglas A. George   Risks and Rewards, Issue 43                    Oct-03                   4     971
         Title                 Author                              Publisher    Date                                   Filename                 Print Size
                                                                                                                                                Pages Kbytes
Bond market             Chet Ragavan         Merrill Lynch                     Apr-05                                                             9    102
implications of the
pension reform

Case (The) Against      Lawrence N. Bader    Pension Section News Feb, 2003    Feb-03    3     449
Stock in Corporate                                                                       news/2003/february/psn0302.pdf
Pension Plans

Case (The) against      Lawrence N. Bader    Financial Analysts Journal        Feb-07      8    402
Stock in Public         Jeremy Gold          Vol. 63 No. 1
Pension Funds

Cashing In:                                  Watson Wyatt Worldwide            Nov-05                                                            3     189
Do Aggressive
Funding Policies Lead
to Higher Credit

Cognitive Dissonance John Shuttleworth       Risks and Rewards, Issue 40       Oct-02       2     488
                        letter response by
                        Edward Friend
         Title                Author                              Publisher    Date                                   Filename                        Print Size
                                                                                                                                                      Pages Kbytes
Comprehensive (A)   Eric Klieber            Eric Klieber                      Sep-03                                                                    7    42
Defined Benefit
Pension Plan Reform

Conceptual              Paul W. McCrossan Risks and Rewards, Issue 47         Aug-05                 7    1614
Framework -                                                                             rewards/2005/august/rrn0508.pdf

Corporate Pension       William F. Sharpe   Journal of Financial Economics    Jan-76                                                                   11    837
Funding Policy

Cross (The) Section of Gabriel Hawawini     Wharton School                    May-98    52    577
Common Stock           Donald B. Keim                                                   &pg=PA3&dq=%22Hawawini%22+%22The+Cross+Section+of+Com
Defined Benefit        Seth Ruthen          PIMCO                             Feb-05    mon+Stock+Returns:+A+Review+of+...%22+&ots=8yC9P96LJZ&sig      6     256
Pension Plans’
Interest Rate
Exposure at Record

Discounting Pension     Lawrence N. Bader   Risks and Rewards                 Jun-94        2    3510
Liabilities under the                                                                   news/1994/june/psn9406.pdf`
New SEC Rules
         Title                 Author                                Publisher    Date                                   Filename                             Print Size
                                                                                                                                                              Pages Kbytes
Does An Actuarial       Ethan E. Kra          Society of Actuaries               Jun-01    30    240
Bias Lead To Equity     Zvi Bodie                                                          actuaries/2000-09/2001/january/RSA01V27N137PD.PDF
Investment?             Jeremy Gold

Draft Editorial         Eric Klieber          Eric Klieber                       Sep-03                                                                        4     61

Durational (Select &    Ron Iverson           The Pension Forum Vol. 15, No. 1   Dec-04                    6     967
Ultimate) Discount      Heidi Rackley                                                      forum/2004/december/pfn0412.pdf
Rates for FAS 87 &      Steve Alpert
106 Valuations          Ethan Kra
Earnings                Daniel Bergstresser                                      May-04                                                                        50    293
Manipulation and        Mihir A. Desai
Managerial              Joshua Rauh
Investment Decisions:
Evidence from
Sponsored Pension

Economics (The) of Andrew L. Turner           Russell Research Commentary        Dec-04                                                                        48    705
Defined Benefit
Pensions and the
Rationality of Pension
Funding Strategies
        Title                Author                              Publisher                   Date                                  Filename                          Print Size
                                                                                                                                                                     Pages Kbytes
Equity Duration –     David M. Blitzer     Standard & Poors                                 Jan-05          5    245
Updated Duration of   Srikant Dash
the S&P 500

Equity Risk Premium Martin L. Leibowitz    CFA Institute                                    Nov-01                          122   2075
Forum                (chr.)                [prior to 2004, known as AIMR: Association for
                     plus 19 other         Investment Management and Research]
                     Robert Arnott, John
                     Campbell, Peng
                     Chen, Bradford
                     Cornell, William
                     Goetzmann, Brett
                     Hammond, Campbell
Equity Risk Premium: Harvey, Roger
                     Richard A. Derrig     North American Actuarial Journal Vol 8, No. 1    Jan-04    32    528
Expectations Great    Elisha D. Orr                                                                  journal/2004/january/naaj0401-4.pdf
and Small

Evaluating the Long- Manuel Ammann   The Geneva Papers on Risk And Insurance Vol 25, No.    Jul-00                             15    514
Term Risk of Equity Heinz Zimmermann 3
Investment in a
Portfolio Insurance
         Title              Author                                 Publisher    Date                                  Filename                                Print Size
                                                                                                                                                              Pages Kbytes
Evolving Pension      Richard H.           unpublished                         Aug-03                                                                           5    45
Actuarial Science     Herchenroether

Final Report of the   Shiraz Y. M.         Canadian Institute of Actuaries     Jan-03                 19    69
Task Force on         Bharmal
Pension Funding       Jean Demers
                      Bernard Dussault
                      Malcolm P.
                      Karen L. Lockridge
                      William M. Loucks
                      Gerald F. Schnurr
Financial Economics   Tim Gordon           Society of Actuaries                Jun-03    28    232
and Pension           Stuart Jarvis                                                     controversy/2004/june/m-rs04-1-17.pdf
The U.K. Experience

Financial Economics   Richard Q. Wendt     Risks and Rewards, Issue 43         Oct-03                      1     971
for Pension Plans                                                                       rewards/2003/october/rrn0310.pdf

Financial Economics: Kenneth Buffin        Commentary :                        Apr-07                      1     57
A Wake-up Call                             Buffin Partners, Inc.
        Title              Author                             Publisher            Date                                  Filename                              Print Size
                                                                                                                                                               Pages Kbytes
Financial Economics: Shane Whelan        The Actuary [UK]                         Dec-02                    2    66

Fixing the Pension   Edward E Burrows    Pension Forum Vol. 16 No. 2              Apr-05    21    172
Plan Funding Rules                                                                         controversy/2004/june/m-rs04-1-23.pdf

Foundations of       Information          The Royal Swedish Academy of Sciences   Dec-02              25    688
Behavioral and       Department
Experimental         No individual cited.
Economics: Daniel
Kahneman and
Vernon Smith

Framework (A) for    Christopher M. Bone The Pension Forum Vol 9, No 1            Jun-96                      10   2340
Establishing                                                                               forum/1996/june/pfn9606.pdf
Corporate Retirement
Funding Policy

Funding defined      David Morton        The Actuary [UK]                         Mar-05                   1     38
benefit pension
        Title               Author                              Publisher                     Date                                   Filename                          Print Size
                                                                                                                                                                       Pages Kbytes
Getting the Models   Richard J. Herring   Wharton School of the University of Pennsylvania   Jun-07     3    169
Right': How to Value (roundtable host)
Hard-to-Price Assets

Group Variable        Tom Lowman          Bolton Partners                                    Mar-04                                                                     15    133
Annuity Pension Plan:
An Optional Plan
Proposal in Response
to Financial
Economics Challenge
to DB Plans

Herbert Simon        Byron Spice          Pittsburgh Post-Gazette                            Feb-01          8     36
Interview & Obituary
Hindsight            Mark Ruloff          Winkelvoss                                         Jul-04                 9     60

How Much Money are Ron Muhlenkamp         Muhlenkamp & Company, Inc.                         Nov-05         12    429
You Willing to Lose
for a Theory?
How to Stop the     Jeremy Gold                                                              Feb-03             2     112
Insanity                                                                                               news/2003/june/psn0306.pdf
         Title             Author                             Publisher                       Date                                  Filename                              Print Size
                                                                                                                                                                          Pages Kbytes
Impact (The) of Fair Jeremy Gold        Risks and Rewards, Issue 40                          Oct-02                     1    488
Value Accounting on                                                                                   rewards/2002/october/rrn0210.pdf
the “Normal” Rate
Impact (The) of      Stephen Brown                                                           Sep-04                 41    253
Pension Assumptions
on Firm Value

Improving 401(k)    William G. Gale     Issue Brief from Center for Retirement Research at   Dec-04    8     66
Investment Return   J. Mark Iwry        Boston College,                                               l
                    Alicia H. Munnell    number 26
                    Richard H. Thaler
Is it Time to       David Bianco        UBS Investment Research                              Mar-05                                                                        10    155

Issue Debt to Fund  Gordon Latter       Merrill Lynch                                        Aug-05                                                                        9     309
Plan Deficits and   Michelle Charles    "Pensions & Endowments"
Capitalize on the
Jensen and Meckling Jacques Thépot      Université Louis Pasteur                             Apr-06              13    207
30 years after: A
game theoretic view
        Title               Author                               Publisher    Date                                 Filename                         Print Size
                                                                                                                                                    Pages Kbytes
Judgment under        Amos Tversky        Science, New Series,               Sep-74 9     2231
Uncertainty:          Daniel Kahneman     Vol 185 Issue 4157                          exactfulltext=and&andorexacttitleabs=and&journal_search_volume_go
Heuristics and Biases                                                                 .x=14&journal_search_volume_go.y=4

Knowledge, Wisdom Philip Booth            Contingencies, reprinted from      Oct-97                                                                       3    2803
or Understanding                          The Actuary [UK]
Loser's (The) Game Charles Ellis          Financial Analysts Journal         Aug-75                                                                       6    458

Making Financial     Neil Brougham        [UK] The Actuary                   May-04                1     24
Economic Sense of
the Future

Making Investment     Zvi Bodie           Draft article                      Jan-07           15   417
Choices as Simple as Jonathan Treussard
An Analysis of Target
Date Retirement

Market (A) is Needed Bernard Dumas,       Financial Times                    Jul-05                                                                       4     98
in Pension Claims    INSEAD
                     Ian Edwards,
                     Andrew Smithers,
                     Smithers & Co
        Title                Author                              Publisher                      Date                                Filename                                Print Size
                                                                                                                                                                            Pages Kbytes
Merton Miller          Rene M. Stulz      The New Palgrave Dictionary                          Apr-06                                                                         9    51

Modern (A)             Jon Exley          [Asset and Liability Management Tools - Chapter 2]   May-06                                                                        19   1364
Perspective on
Investment Policy

Modern Valuation       Stuart Jarvis      The Staple Inn Actuarial Society                     Feb-01    57   1225
Techniques             Frances Southall                                                                 Valuations
                       Elliot Varnell

Morris Review of the Sir Derek Morris     Her Majesty's Treasury [UK]                          Mar-05                                                                       168    694
Actuarial Profession

Nature (The) of Risk                      Mellon Investment Update                             Mar-06                                                                        2     452

New York City Story Nicholas Dunbar       Life & Pensions Magazine                             Jun-06                                                     5     103
Next (The) Savings     David Zion         Credit Suisse/First Boston                           Jan-05                                                                        25    333
and Loan Crisis?       Bill Carcache
         Title                Author                             Publisher                    Date                                    Filename                             Print Size
                                                                                                                                                                           Pages Kbytes
Noisy (The) Market'    Jeremy J. Siegel   Wall Street Journal                               6/14/2006                5    39

Not Such a Great      Shane Whelan        The Actuary [US]                                   Dec-06     6     48
Controversy:                                                                                           actuary-magazine/december-2006/pub-not-such-a-great-
Actuarial Science and                                                                                  controversy.aspx
Financial Economics

Off-Balance-Sheet      David Zion Bill    Credit Suisse/First Boston                         Jun-05                                                                         8     144
Activity Back in the   Carcache

On the Risk of Stocks Zvi Bodie           Financial Analysts Journal                         Jun-95                             3     53
in the Long Run

Overview:              Olivia Mitchell    Pension Research Council                           Sep-03                                                                         16    101
Developments in Risk   Kent Smetters
Management for
Retirement Security
Pension Actuary's      Gordon Enderle     Joint AAA/SOA Task Force on Financial Economics    Oct-06                     449
Guide to Financial     Jeremy Gold        and the Actuarial Model
Economics              Gordon Latter
                       Michael Peskin
Pension Deficits: An   Lawrence N Bader   Financial Analysts Journal                         Jun-04                             7     839
Unnecessary Evil
        Title                Author                            Publisher    Date                                  Filename                                 Print Size
                                                                                                                                                           Pages Kbytes
Pension Design and Olivia Mitchell      Pension Research Council           Jul-04                                                                           41    188
Structure              Stephen Utkus
Chap. 1: Lessons
from Behavioral
Finance for
Pension Funding: A Arnold F. Shapiro    Society of Actuaries               Jul-05    34    306
Historical Perspective                                                              of-pension-plan-funding-and-disclosure-

Pension Reform        Jay Cooper        Merrill Lynch                      Apr-05                                                                           2     80
Spells $200B Fixed
Income Shift
Pension Valuation     Eric J. Klieber   Contingencies                      Oct-02                   5     113
Needs More
Disclosure, Not a
New Formula

Pensions and Capital John Ralfe         Society of Actuaries               Jun-03     21    204
Structure:           Cliff Speed                                                    controversy/2004/june/m-rs04-1-03.pdf
Why Hold Equities in Jon Palin
the Pension Fund?

Primer (A) in         S. F. Whelan      B. A. J.                           Jul-02                 39    414
Financial Economics   D. C. Bowie
                      A. J. Hibbert
         Title              Author                             Publisher           Date                                 Filename                                Print Size
                                                                                                                                                                Pages Kbytes
Primer (A) on         Yanni Partners     Measuring Up                             Oct-06                                                                          4    764
Portable Alpha                           Vol. 18 No. 4

Principles (The) of   Jack L. Treynor    Journal of Finance                       May-77                  12    757
Corporate Pension

Prospect Theory:      Daniel Kahneman    Econometrica, Vol 47 Issue 2             Mar-79                                                                         31   2890
An Analysis of        Amos Tversky
Decision under Risk

Psychology and         Luke N. Girard    Risks and Rewards                        Feb-99                       2     513
Financial Markets:                                                                          rewards/1999/march/rrn9903.pdf
Richard H. Thaler
Addresses the
Investment Section
Puzzling (The) State Michael C. Jensen   Social Science Research Network (SSRN)   Aug-05               20    908
of Low-Integrity
Relations Between
Managers and Capital
Rationale (The) of the Karl Borch        The American Economic Review             Jun-74     3    323
Mean-Standard                            Vol. 64 No. 3                                      Ai_3A3_3Ap_3A428-30.htm
Deviation Analysis:
        Title               Author                               Publisher       Date                                    Filename                           Print Size
                                                                                                                                                            Pages Kbytes
Rationale (The) of the S. C. Tsiang       The American Economic Review          Jul-74   9    1158
Mean-Standard                             Vol. 64 No. 3                                   Ai_3A3_3Ap_3A442-50.htm
Deviation Analysis:
Reply and Errata for
Original Article
Reaffirming Pension Dimitry Mindlin       Pension Forum Vol. 16 No. 2           Apr-05                 21     150
Actuarial Science                                                                         forum/2005/april/pfn0504.pdf

Reforming the         David W. Wilcox     Division of Research and Statistics   Mar-06             61     485
Defined-Benefit                           Federal Reserve Board
Pension System in the
United States
[Preliminary and
incomplete draft]

Reinventing Pension   Lawrence N. Bader   The Pension Forum Vol. 15, No. 1      Jan-03                  34     1785
Actuarial Science     Jeremy Gold                                                         forum/2003/january/pfn0301.pdf
         Title                 Author                             Publisher                  Date                                 Filename                      Print Size
                                                                                                                                                                Pages Kbytes
Rethinking Pension      Ronald J. Ryan,     THE JOURNAL OF PORTFOLIO MANAGEMENT             Jul-02                                                                9    500
Liabilities and Asset   Frank J. Fabozzi

Rise (The) of Liability Yanni Partners      Measuring Up                                    Jan-07                                                                4    434
Driven Investing                            Vol. 19 No. 1

Risk (The) of        Raymond Murphy         Pension Section News Sep, 2006                  Sep-06       3     931
Declining Market Cap                                                                                  news/2006/september/PSN0609.pdf
with Large Pension

Risk Transfer in     Jeremy Gold            Pension Research Council                        Oct-02                                                               25    143
Public Pension Plans                        Draft chapter for The Pension Challenge: Risk
                                            Transfers and Retirement
                                            Income Security.

Shareholder (The) -     Jeremy Gold         Pension Research Council                        Dec-00                101    293
Optimal Design of                           Working Paper [Draft]
Cash Balance Plans

Statement on            George G. Benston   Financial Economists Roundtable                 Dec-04    10    70
“CORPORATE              Dennis E. Logue
PENSION FUND            Elroy Dimson
ACCOUNTING”             Jeremy Siegel
         Title               Author                               Publisher    Date                                  Filename                                Print Size
                                                                                                                                                             Pages Kbytes
Statement on          K.J. Arrow, R.         AEI-Brookings Joint Center       May-07                 8    121
Prediction Markets    Forsythe, M.
                      Gorham, R. Hahn, R.
                      Hanson, D.
                      Kahneman, J.O.
                      Ledyard, S.
                      Levmore, R. Litan,
                      P. Milgrom, F.D.
                      Nelson, G.R.
                      Neumann, M.
Stocks are Still an   Ottaviani, C.R. Plott, Wall Street Journal
                      Jeremy Siegel                                           Jul-02                                                                          1     171

Stocks Not For the    Raymond Fazzi        Financial Advisors Magazine        Jan-04    11    22
Long Run                                                                                =3&idArticle=350&idPastIssue=79

Stop Thief!           Tim Bond             Barclays Capital Research          Jan-06                                                                          6     148
Successful Defined    Mark Ruloff                                             Jun-04                3      60
Benefit Plans Cost
Less with Bonds
        Title                  Author                              Publisher                    Date                                 Filename                             Print Size
                                                                                                                                                                          Pages Kbytes
Tax (The)                Fischer Black       Financial Analysts Journal                        Aug-80             9    667
Consequences of
Long-Run Pension

Taxation and             Irwin Tepper        Journal of Finance                                Mar-81               13    764
Corporate Pension
The Cost of Capital,     Franco Modigliani   American Economic Review                          Jun-58    38   2051
Corporation Finance      Merton H. Miller                                                                &pg=PA3&dq=%22Modigliani%22+%22The+Cost+of+Capital,+Corp
and the Theory of                                                                                        oration+Finance+and+the+Theory+...%22+&ots=yqhCurxuJl&sig=lwa

The U.S. Pension                             The Committee on Investment of Employee Benefit   Mar-04                                                                     100   1923
Crisis: Evaluation and                       Assets CIEBA
Analysis of Emerging
Defined Benefit
Pension Issues

Treatment of Pension Lawrence N. Bader       AIMR                                              May-03                6     199
Plans in a Corporate
        Title               Author                             Publisher               Date                                 Filename                              Print Size
                                                                                                                                                                  Pages Kbytes
UBS Investment       Stephen Cooper     UBS Q-Series                                  Sep-03                                                                       61    688
Research             David Bianco
Pension Fund Asset

Understanding Equity Richard Q. Wendt   Risks and Rewards, Issue 38, Special Insert   Feb-02                     42   1536
Risk Premium                                                                                    rewards/2002/february/rrn0202.pdf

Understanding the    Holger Hofling     The Pension Forum Vol 15, No 1                Dec-04                   34   1027
Corporate Bond Yield Rudiger Kiessel                                                            forum/2004/december/pfn0412.pdf
Curve                Gunther Loffler

Valuation of Pension Richard Q. Wendt   The Pension Forum Vol 15, No 1                Dec-04                   13   1027
Obligations with                                                                                forum/2004/december/pfn0412.pdf
Lump Sums

Value (The) of       John Pemberton     The Staple Inn Actuarial Society              Feb-98    40    125
Actuarial Values
         Title               Author                              Publisher     Date                                   Filename                         Print Size
                                                                                                                                                       Pages Kbytes
Valuing Companies,     Lawrence N. Bader   Contingencies                      Oct-02           5    129
Valuing Pension        Eric Klieber

Welfare (The) of       Henry G. Manne      Wall Street Journal               6/13/2006          2     71
American Investors

What are Corporate     Jeremy I. Bulow     Quarterly Journal of Economics     Aug-82                             18   1292
Pension Liabilities?                       vol 97, no 3                                 5533%28198208%2997%3A3%3C435%3AWACPL%3E2.0.CO%3B

What is Risk (Part II) Ron Muhlenkamp      Muhlenkamp & Company, Inc.         Jul-03    8     283

What is Risk?          Ron Muhlenkamp      Muhlenkamp & Company, Inc.         Jul-03       8     181

What Pension Scheme Robert Clarkson        The Actuary [UK]                   Jul-06                 2     76
Deficits                                                                                                                                                2
        Title               Author                            Publisher    Date                                  Filename                         Print Size
                                                                                                                                                  Pages Kbytes
What’s next?—DB        Jeremy Gold      The Actuary [US]                  Oct-03        19    1182
plans for the long run                                                             09/2003/october/act0310.pdf

Yikes! How to Think Alicia H. Munnell   Center for Retirement Research    Jan-05     8     59
about Risk?         Steven A. Sass      Issue in Brief No. 27
                    Mauricio Soto
Title   Author   Publisher   Date   Filename   Print Size
                                               Pages Kbytes
         Title            Subject(s) abstract

1/n (The) Pension         BE, IN   This paper examines the so-called 1/n investment puzzle that has been observed in defined
Investment Puzzle                  contribution plans whereby some participants divide their contributions equally among the
                                   available asset classes. It has been argued that this is a very naive strategy since it contradicts the
                                   fundamental tenets of modern portfolio theory. We use simple arguments to show that this
                                   behavior is perhaps less naive than it at first appears. It is well known that the optimal portfolio
                                   weights in a mean-variance setting are extremely sensitive to estimation errors, especially those in
Accounting/Actuarial               Although pension finance theory says most defined benefit pension error, the 1/n rule has some
                          AC, PF the expected returns. We show that when we account for estimation plans sponsored by publicly
Bias Enables Equity                traded corporations should invest entirely in fixed income, 60% of assets are invested in equities.
Investment by                      The existing theory makes a strong – but often unstated – assumption of transparency, implying
Defined Benefit                    that investors view the pension plan as a financial subsidiary of the operating parent and value it
Pension Plans
Actuaries discuss the              Financial economics, I explain the to actuarial science, calls into question some to how investors
                          PF, AC as a market portfolio. when appliedequity choice made by managers as a reaction basic principles.
principles of financial            Many actuarial principles are based on understanding of the stock market and pension plans with
economics of pension               which financial economists would disagree. To get a more comprehensive understanding of the
accounting                         principles that play an integral role with financial economics, The Actuary spoke to four actuaries
                                   who are subject matter experts in their field:
Adding an Annuity to               Three structural flaws make defined contribution (DC) plans less efficient vehicles for delivering
                          DE, TR, IN
Improve Defiined                   retirement financial security than traditional defined benefit (DB) plans.
Contribution Plan                  This article examines the benefits associated with expanding DC plan investment options to
Options                            include annuities.
Adequate Funding for      MF       In setting the funding policy, the fact that the assets being accumulated are earmarked to cover
a Pension Plan                     pension obligations must be recognized. Thus, both the ultimate goal and the interim measure
                                   must involve an asset plan, a liability plan, and a contribution plan that are fully integrated with
                                   each other. To set up a funding policy that only includes a liability and contribution plan is to lose
                                   sight of half of a balance sheet. To set up asset and liability plans that are independent of each
                                   other is not enough because of the impact of asset and liability performance on each other.
Agency Problem            PF, BE Also sometimes referred to as the principal-agent problem. The difficult but extremely important
                                   and recurrent organizational design problem of how organizations can structure incentives so that
                                   people (“agents”) who are placed in control over resources that are not their own with a
                                   contractual obligation to use these resources in the interests of some other person or group of
                                   people actually will perform this obligation as promised — instead of using their delegated
                                   authority over other people's resources to feather their own nests at the expense of those whose
                                   interests they are supposed to be serving (their “principals”). Enforcing such contracts will
                                   involve transaction costs (often referred to as agency costs), and these costs may sometimes be
An Actuary Looks at       PF, IN The cost of financial guarantees to investors and policy holders is examined using option pricing
Financial Insurance                methods of Black-Scholes. Traditional actuarial methods are not a good match to analyze these
         Title         Subject(s) abstract

Are Stocks "Too        IN, MV The models that seek to determine fair value for stocks use corporate earnings and a capitalization
High"?                        rate (such as a price/earning ratio) to arrive at "fair value". Nearly all such models use interest
                              rates to set the capitalization rate. Current interest rates are assumed to be fair, as if there were no
                              emotions in the bond market. Interest rates themselves are never viewed as "too high" or "too
                              low." For the past 10 years [1984-1993] stocks have been viewed as "too high," in relation to
                              interest rates. In reality, interest rates have been too high.
Asset-Liability        IN, MV This Specialty Guide is a background reading reference for the practice of asset-liability
Professional Specialty        management (ALM). It is being published to offer guidance not only to actuaries seeking to gain
Guide                         knowledge on ALM as it relates primarily to life and health insurance, but also to practitioners in
                              the property and casualty insurance and pensions fields.
                              ALM means different things to different people. It can mean duration and convexity matching,
                              immunization, optimization, stochastic modeling, performance management and measurement,
                              risk management, and so on. These different notions of ALM occur in part due to differences by
                              practice area (for example, pension fund management versus life insurance product development)
                              and in part due to differences in training, such as Casualty Actuarial Society (CAS) versus
                              Chartered Financial Analyst (CFA).
Assumed Rates of       PF, MF This paper uses arbitrage principles to show that the use of expected returns including equity
Discount for                  premia is biased in favor of early generations at the expense of later generations, a wealth transfer
Valuations of Publicly        disguised as risk diversification over time. It is shown that unbiased results can be developed, with
Sponsored Defined             no wealth transfers between generations, by assuming risk-free rates of return independently of the
Benefit Plans                 actual asset mix.
                              Because cost computations anticipate equity premia, governments are likely to offer their
                              employees pension benefits and valuable options (Skim funds) at less than their risk-adjusted cost,
Behavioral Economics BE       Behavioral Economics is the combination of psychology and economics that investigates what
                              happens in markets in which some of the agents display human limitations and complications. We
                              begin with a preliminary question about relevance. Does some combination of market forces,
                              learning and evolution render these human qualities irrelevant? No. Because of limits of arbitrage
                              less than perfect agents survive and influence market outcomes. We then discuss three important
                              ways in which humans deviate from the standard economic model. Bounded rationality reflects
                              the limited cognitive abilities that constrain human problem solving. Bounded willpower captures
                              the fact that people sometimes make choices that are not in their long-run interest. Bounded self-
                              interest incorporates the comforting fact that humans are often willing to sacrifice their own
                              interests to help others. We then illustrate how these concepts can be applied in two settings:
                              finance and savings. Financial markets have greater arbitrage opportunities than other markets, so
                              behavioral factors might be thought to be less important here, but we show that even here the
Behavioral Finance     BE     .. some observers argue that the empirical data do not support the Efficient Markets Hypothesis.
                              They claim that there are anomalies in price movements that cannot be explained through EMH.
                              Because of these perceived shortcomings, a new approach to explaining financial markets has
                              recently emerged known as behavioral finance.
         Title        Subject(s) abstract

Bond market           IN, MF, The Bush administration’s proposal to reform Social Security has received enormous attention
implications of the   PG      lately. Lost in the ensuing debate over the crisis (or lack thereof) faced by the Social Security
defined-benefit               system, however, is a set of new proposals put forth by the administration to fix problems facing
pension reform                corporate defined-benefit (DB) plans.
                                The administration’s reform proposal, along with several other initiatives that are currently being
                                debated by the Financial Accounting Standards Board (FASB), the U.S. Treasury and the credit
                                rating agencies, has important implications for fixed income markets. This paper highlights some
                                of the issues raised by these various reform proposals and their financial implications for the fixed
                                income market, especially in the long end of the yield curve.
Case (The) Against    PF, IN    This article focuses on the real economics rather than GAAP accounting. For this purpose, we
Stock in Corporate              assume a transparent financial system, in which shareholders have full information about
Pension Plans                   corporate pension funds and recognize that they experience the risks and rewards of these funds.
                                Needless to say, today’s system falls well short of that standard, but it is advancing rapidly in that
                                direction, as the accounting profession progresses toward a market value paradigm and the
                                financial community improves its understanding of pension plans.
Case (The) against    PF, IN    In two of the earliest papers in pension finance, Black (1980) and Tepper (1981) showed that
Stock in Public                 shifting corporate pension plan investments from equities to bonds can add value for shareholders
Pension Funds                   through a tax arbitrage. Many observers (e.g., Sutcliffe 2004) believe that tax arguments for bond
                                investment in corporate plans are irrelevant to governmental pension funds.
                                Nonetheless, we show that in a transparent financial environment, shifting governmental (public)
                                pension fund investments from equities to bonds adds value for local taxpayers through a federal
                                tax arbitrage. We also observe that equity investment by governmental plans involves many risks
                                in addition to market risks. Public plan sponsors should prepare for changes that will occur as
                                greater transparency lowers the obstacles to an all-bond strategy.
Cashing In:           IN, PF    This article takes a fresh look at the relationship between pension deficits and the credit ratings of
Do Aggressive                   sponsoring firms. Using data from Fortune 1000 pension sponsors over the past three years, we
Funding Policies Lead           find a notable positive relationship between higher pension deficits and lower credit ratings. Since
to Higher Credit                lower debt ratings generally drive up the cost of borrowing, this relationship suggests that
Ratings?                        leveraged firms may be able to reduce overall costs by diverting available cash flow to shore up
                                their pension plans. Indeed, the analysis clearly indicates that some firms have already moved
Cognitive Dissonance PF         [The essay on page 26] ran in the June 2002 issue of The Actuary. Ed Friend has submitted a
                                response to this article by John Shuttleworth. Ed suggested that we reprint the original article and
                                his response. The Actuary is published by the Staple Inn Actuarial Society and is the official
                                publication of the actuarial profession in e United Kingdom.
        Title          Subject(s) abstract

Comprehensive (A)   MF, FF,    ERISA introduced a wide variety of reforms - minimum participation and vesting standards,
Defined Benefit     DE, PG     minimum funding standards and tighter restrictions on tax-deductible contributions, limits on
Pension Plan Reform            benefits and plan termination insurance. Since the passage of ERISA, most restrictions from the
Proposal                       original law have been tightened by subsequent legislation. With nearly thirty years of experience
                               under ERISA behind us, it seems clear that, at least with respect to defined benefit plans, the cure
                               has nearly killed the patient. The number of defined benefit plans and the percentage of US
                               workers participating in defined benefit plans have both decreased dramatically, many remaining
                               sponsors are freezing or terminating their plans, and the plan termination insurance program is
Conceptual             AC, BE, This is an excerpt from a longer address to the International Accounting Standards Board on
Framework -            RK      guiding principles. As the IASB and the European Commission work out application of a “fair
Thoughts                       value option” and continue to debate standards for portfolio hedging, these principles affect
                               actuarial practice and risk management. ALM practitioners are familiar with the debate: how
                               efficiently do insurance contract-holders and pension plan members exercise their options? Why
                               are deposits automatically classed as liabilities? Which assumptions lead to useful information and
                               sound management decisions, and why?
                                Mr. McCrossan is a member of Eckler Partners, an affiliate of Milliman Global. The unabridged
Corporate Pension      PF, IN What policy should a corporation adopt concerning the funding of a defined-benefit pension plan
Funding Policy                 and the investment of the assets held in trust for the plan? Until recently, pension plans did not
                               have to be insured, and some risk could be borne by intended beneficiaries. Federal legislation
                               has now mandated such coverage. This paper analyzes corporate policy under three conditions
                               which correspond, roughly , to the earlier situation ('uninsured' loans), the current situation
                               ('partially insured' loans), and the situation required by law to be implemented in the future
                               ('completely insured' plans). We show that if insurance premiums are set correctly, corporate
                               policy in this area may not matter; otherwise the optimal policy may simply be that which
                               maximizes the difference between the value of the insurance and its cost.
Cross (The) Section of FE, IN A growing number of empirical studies suggest that betas of common stocks do not adequately
Common Stock                   explain cross-sectional differences in stock returns. Instead, a number of other variables (e.g.,
Defined Benefit        PF      Three secular trends have combined to leave U.S. defined benefit pension plans more exposed to
Pension Plans’                 an unwanted decline in interest rates than at any time in at least the last 50 years.
Interest Rate                  Two of these trends, a 25-year secular decline in interest rates and a long-term shift away from
Exposure at Record             fixed income by pension plans, are well known. The third trend, a continuing shift in the
High                           composition of pension plans’ fixed income allocations, has received less attention but has served
                               to magnify the risk to pension plans and increase the likelihood that corporate sponsors will need
                               to contribute new cash to their pension plans in the event of a decline in interest rates.
                               PIMCO estimates that the combination of these three secular trends has left the average defined
                               benefit pension plan unhedged on more than 90% of its interest rate exposure.
Discounting Pension PF, MV This article is a condensation of "Introducing the Salomon Brothers [now Citigroup] Pension
Liabilities under the          Discount Curve and Pension Liability Index"
New SEC Rules
         Title        Subject(s) abstract

Does An Actuarial     PF, IN,   Summary: A controversial alternative to ERISA/FASB actuarial cost methods and assumptions is
Bias Lead To Equity   AC        presented as a challenge from the discipline of financial economics.
Investment?                     1. It is argued that economic assumptions prescribed by ERISA and the FASB are financially
                                biased in a fashion that favors equity investments. This is detrimental to shareholders, risky to the
                                PBGC, and of ambiguous benefit to plan participants. A comparison is made between existing
                                methods/assumptions and alternatives that are, in the language of finance, "transparent." FASB's
                                current "fair value" paradigm follows the transparent financial model.
                                 2. The combination of transparent actuarial cost methods, unbiased actuarial economic
                                assumptions and the Internal Revenue Code Imply that, in the future, U.S.-defined benefit plans
                                will be invested entirely in fixed income. This will reduce the risk exposure of the PBGC, provide
                                tax benefits to shareholders, and provide participants with a more certain measure of their benefit
Draft Editorial       AC        A common put-down today is to call something "so twentieth century." Of the accounting
                                profession, it can legitimately be said it's "so fifteenth century." It's time for accountants to leap
                                ahead six centuries to provide the information needed by investors of the twenty-first century.
Durational (Select & AC, PF     Issues come with the application of a "yield curve" to calculation of actuarial present values.
Ultimate) Discount              Common mistakes are corrected. Yield curves and their application are explained.
Rates for FAS 87 &
106 Valuations
Earnings              AC        Managers appear to manipulate firm earnings when they characterize pension assets to capital
Manipulation and                markets and alter investment decisions to justify, and capitalize on, these manipulations. We
Managerial                      construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return
Investment Decisions:           on pension assets. Managers are more aggressive with assumed long-term rates of return when
Evidence from                   their assumptions have a greater impact on reported earnings. Managers also increase assumed
Sponsored Pension               rates of return as they prepare to acquire other firms and as they exercise stock options, further
Plans                           confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in
                                turn, influence asset allocation within pension plans. Instrumental variables results suggest that a
                                25 basis point increase in the assumed rate of return is associated with a 5% increase in equity
                                allocation. Taken together, these results suggest that earnings manipulation arising from
                                managerial motivations influences significant managerial investment decisions.
Economics (The) of PF, IN       Pension finance has attracted the attention of a small and particularly impressive group of
Defined Benefit                 academicians and practitioners. Over the last twenty years, the recommendations of this group of
Pensions and the                thinkers have run counter to prevailing practice and conventional wisdom. For the most part, their
Rationality of Pension          recommendations have been ignored. This paper is about those ideas, their essential relevance to
Funding Strategies              shareholders, workers, and society, and why it is time to embrace them. Economic analysis reveals
                                that: the markets should (and the empirical evidence suggests they do) regard pension liabilities as
                                corporate debt (to be valued at an appropriate corporate debt rate) and pension assets should be
                                valued at market; in the absence of tax effects, pension investment policy is irrelevant; and in
                                many countries such as the US, the UK, and Canada, tax arbitrage possibilities favor holding debt
         Title         Subject(s) abstract

Equity Duration –   FE, IM, INAkin to the well-known concept of bond duration, equity duration measures the sensitivity of
Updated Duration of           equities to interest rates. Although research on this subject is more recent and the concept is rarely
the S&P 500                   used in practice, we believe equity duration is of significant importance in immunization, risk
                              management, and asset allocation.
Equity Risk Premium RK, IN Leibowitz, "Our goal here today is to foster a very candid discussion of the many facets of the
Forum                         equity risk premium. Generally, the risk premium is thought of as the incremental return of certain
                              equity market components relative to certain fixed-income components."

                                 from Roger Ibbotson summary: "First, we see a need for clarification of what we mean by the
                                 equity risk premium: I think all of us in this room see it as an expectation, not a realization; if we
                                 look at realizations, it’s to help us understand expectations. ... The second issue is the use of
                                 “arithmetic” versus “geometric.” Every time we make a forecast, we should say whether the
                                 forecast is arithmetic or geometric and which risk-free rate we are using—U.S. T-bills, the long
                                 bond, or TIPS. Third, we need to distinguish between yields and returns. … Fourth, we should
Equity Risk Premium: IN,RK       The historical the forecast for the stock market are talking about a short pricing horizon.
                                 always specifyrealized ERPhorizon—whether weappears to be at odds withor a longtheory …
Expectations Great               parameters for risk aversion. Since 1985, there has been a constant stream of research, each of
and Small                        which reviews theories of estimating market returns, examines historical data periods, or both.
                                 Those ERP value estimates vary widely from about _1% to about 9%, based on a geometric or
                                 arithmetic averaging, short or long horizons, short- or long-run expectations, unconditional or
                                 conditional distributions, domestic or international data, data periods, and real or nominal returns.

                                 This paper examines the principal strains of the recent research on the ERP and catalogues the
                                 empirical values of the ERP implied by that research. In addition, the paper supplies several time
                                 series analyses of the standard Ibbotson Associates 1926–2002 ERP data using short Treasuries
                                 for the risk-free rate. Recommendations for ERP values to use in common actuarial valuation
Evaluating the Long- PF, IN      The impact of the time horizon upon the risk of equity investments is still a controversial issue. In
Term Risk of Equity              this paper, we analyse long-term risk in a portfolio insurance framework based on option pricing
Investment in a                  theory. The insurance strategies are implemented alternatively with a portfolio of stocks and put
Portfolio Insurance              options or bonds and call options. The risk of stock holdings is measured by the permissible
Framework                        realtive stock position in the replicating portfolio for an exogenous floor function. Our findings
                                 indicate that there is no general conclusion as to the long-term risk of stocks; the risk can only be
                                 determined for specific floor functions. Because the utility function is implicit in any floor
                                 specification, we argue that the assumption of preference-free determination of risk with the help
                                 of option-pricing theory, as recently suggested in the literature, is a fallacy. Moreover, the
         Title        Subject(s) abstract

Evolving Pension      PF, BE, Continual study, evolution if you will, benefits actuarial science. Some have proposed we adopt
Actuarial Science     TR      the principles of the neo-classical financial economics model to reinvent -- that is replace -- the
                              pension actuarial methods and practices we have traditionally used. But the pension field, indeed
                              all of actuarial science, is as much about human psychology as it is about probability functions.
                              As such, a broader economics model is necessary. Fortunately, the behavioral economics field of
                              study provides that broader view. The experimental economics field adds the tool to investigate
                              the human dimension and yield a predictability to our choices. Behavioral and experimental
                              economics improve the usefulness of economics in understanding our financial world. The 2002
                              Nobel prize in economics recognized Daniel Kahneman and Vernon L. Smith for their work in
                              these fields. Let's evolve, not reinvent, and use all the tools of economic study, not just the rigidly
Final Report of the   MF, FF The task force believes that we need to address the following key philosophical question:
Task Force on
Pension Funding                 “What role should the profession play in the reporting and certification of pension plan funding?
                                Is it only to provide expertise and an acceptable process for measuring the level of funding
                                achieved compared to given objectives? Or is it to provide a professional opinion about the
                                efficacy of funding by establishing bounds outside of which it is not prepared to lend its Accepted
                                Actuarial Practice (AAP) imprimatur?”

Financial Economics PF, AS      There has been strong resistance within the U.K. actuarial profession against taking on board the
and Pension                     lessons of financial economics. Nevertheless, the majority of the largest U.K. actuarial firms have
Actuaries:                      significantly modified their standard approaches to actuarial valuations to take account of
The U.K. Experience             criticisms based on financial economics. In the meantime, the failure to come to terms with basic
                                lessons from financial economics has caused the U.K. actuarial profession to lose credibility with
                                key players in the United Kingdom. The U.K. actuarial profession has still not come to a single
                                view on financial economics, and the major divisions that remain continue to hamstring its policy
Financial Economics   FE, PF    [After the Great Pension Controversy Symposium in Vancouver] many of my actuarial colleagues
for Pension Plans               who did not attend have asked, "Exactly what is financial economics and what does it have to do
                                with pension plans?"
Financial Economics: FE         In 1998 The Actuarial Foundation published a 669-page textbook, Financial Economics with
A Wake-up Call                  Applications to Investments, Insurance and Pensions that its editor described as suitable for a two
                                semester course at the early graduate school level. The title page with the imprimatur of The
                                Actuarial Foundation included the words Preparing for tomorrow’s possibilities . That tomorrow
                                may perhaps now have arrived, some nine years later, with the publication of Pension Actuary’s
                                Guide to Financial Economics prepared by the Joint American Academy of Actuaries and Society
                                of Actuaries Task Fo rce on Financial Economics and the Actuarial Model.
        Title        Subject(s) abstract

Financial Economics: FE        Hans Bühlmann posed a riddle a few years ago. ‘Looking back’, he said, ‘it is difficult to
Actuaries'                     understand why the approaches and solutions developed for today’s financial sector, which are
Contributions                  clearly orientated towards mathematics, or to be more precise towards probability theory, did not
                               originate from the breeding ground of actuarial thinking’. A recent paper in the BAJ (Vol 8, Part
                               I) hints at a disturbing reason. The paper, ‘A Primer in Financial Economics’, takes a few detours
                               in mapping out the terrain of financial economics that shows that actuaries anticipated important
                               insights in financial economics, but failed to develop their ideas or disseminate them to a broader
Fixing the Pension   MF        Recent events suggest that it’s time to reexamine existing pension plan funding rules and consider
Plan Funding Rules             changes. This is a discussion of how the current rules came into being, their shortcomings, and
                               possible replacing rules.
Foundations of       BE        Human decision-making deviates in one way or another from the standard assumptions of the
Behavioral and                 rationalistic paradigm in economics. If such deviations from rationality and self-interest were
Experimental                   small and purely idiosyncratic, they would on average cancel out, and economic theory would not
Economics: Daniel              be too wide off the mark when predicting outcomes for large aggregates of agents. Following the
Kahneman and                   lead of Vernon Smith, early studies of alternative market mechanisms by experimental economists
Vernon Smith                   can be viewed as tests of the hypothesis of idiosyncratic deviations 2 from standard economic
                               theory. If deviations from rationality and self-interest were systematic, however, this would call
                               for a revision of economic theory itself. Following the lead of Daniel Kahneman and the late
                               Amos Tversky, early studies of human decision-making by cognitive psychologists can be seen as
                               testing hypotheses of systematic deviations from rationality.
Framework (A) for    MF        This paper recommends the following four criteria for measuring the adequacy of proposed
Establishing                   funding policies.
Corporate Retirement           I. Management Review and Commitment.
Funding Policy                 II. Adequacy of Plan Assets/Benefit Security. In effect, this criterion requires that, should a
                               pension plan (or plans) be terminated, retirees would be secure in their pensions and active
                               employees would find an equity in the fund assets commensurate with their accrued pensions for
                               service rendered through the date of plan termination.
                               III. Reasonable Stability in and Understanding of Anticipated Contribution Patterns.
                               IV. Adoption of a Rational and Systematic Actuarial Method.
Funding defined      PF, AS,   The paper, ‘Funding defined benefit pension schemes’, which was produced by Charles Cowling,
benefit pension      MF        Tim Gordon, and Cliff Speed, and the discussion on the night serve to highlight the difference in
schemes                        opinion that exists in the debate on how the funding target of defined benefit (DB) pension
                               schemes should be derived. The debate centered around the appropriateness of what some might
                               call traditional pension scheme funding techniques, which take advance credit for expected future
                               investment return, and techniques which do not, e.g. funding targets which are related to scheme
                               solvency, as proposed by the authors.
         Title         Subject(s) abstract

Getting the Models    MV, BE What are things worth? It's a devilish problem in the business world, where companies need to
Right': How to Value          account for the fast-changing values of complex financial instruments -- from insurance policies to
Hard-to-Price Assets          employee stock options to exotic derivatives -- for which there is no ready sales history. Yet
                              accounting standards are tightening, requiring that businesses justify valuations rather than simply
                              use their best guess or original purchase price, as they did in the past. So firms are turning to ever
                              more complicated financial models that attempt to deduce values using an array of indicators.
Group Variable        MF, PF This is a proposal to change the law on defined benefit (DB) plan design in response to the
Annuity Pension Plan:         challenges facing DB plans. The proposed design would tie benefits to funding levels. Doing so
An Optional Plan              puts participants at risk so something must be offered: benefit indexation (e.g. a COLA). My
Design/Legislative            intent is to find a balance between the needs of participants, plan sponsors and the government
Proposal in Response          (e.g. the PBGC). This plan design is intended only to be an option to current plan designs: it is
to Financial                  not intended to replace existing defined benefit plan designs.
Economics Challenge           An advocate of just one or two parts of this triangle would likely make modifications to this
to DB Plans                   design. Some possible “advocacy modifications” I have indicated as options to various key
                              features of my core proposal.
Herbert Simon         BE      A look back on a lifetime of academic work in human cognition.
Interview & Obituary
Hindsight             MF, FF, A plan sponsor asked me a very interesting question. He noted that if we looked back at where we
                      IM      were 10 years ago, we would find that we set out anticipating a certain level of expected return on
                              the pension portfolio. Had we gone to sleep and woke up 10 years later (now), we might ask how
                              our portfolio did. We would be told that our portfolio return was higher than we anticipated. We
                              would be happy and think we were in great shape. However, we would be surprised to later learn
                              that we were in terrible shape and we were experiencing the pension “perfect storm”.
                              How did this happen? I took a sample case we commonly use to take a look at this. I ran some
                              projections, but based on starting in 1994. I first ran the projections based on what one might have
                              expected, and then reflected the actual historical experience to see what would have happened. I
                              then examine one alternative, and looked at the experience under that as well.
How Much Money are IN         Risk adjusted returns.
You Willing to Lose
for a Theory?
How to Stop the       MF      At the 2002 Enrolled Actuaries Meeting, Donald Segal and Tonya Manning asked ERISA
Insanity                      authorities to “Stop the Insanity.” In the authors’ response to comments on our article
                              “Reinventing Pension Actuarial Science,” Larry Bader and I have said that funding rules require
                              societal, or political, judgments. In this article, I try to identify and thereby confine, the public’s
                              interest in defined benefit plan funding. Thus, for the time being, I put aside the pursuit of a new
                              theory of pension actuarial science in favor of a practical proposal to Stop the Insanity.
         Title      Subject(s) abstract

Impact (The) of Fair AC, MV,   I speculate that the worldwide promulgation of fair value accounting standards will make the
Value Accounting on IN         normal shape of the rate curve downward sloping. Upward sloping curves will be the occasional
the “Normal” Rate              exception rather than the rule.
Curve—A                        Why do I so speculate? I hypothesize that fair value accounting will alter perceived risk, which, in
Speculation                    turn, will alter both supply and demand along the duration dimension.
Impact (The) of      AC        I examine the association between disclosed financial accounting data and firm value, while
Pension Assumptions            incorporating the effect of managerial discretion in reporting those data. I focus on the
on Firm Value                  assumptions used to compute a firm's pension liability. I find that firm values are consistent with
                               analysts being aware of the likely influence of reporting incentives on managers' choices of
                               assumptions. Analysts appear to be aware of the incentives associated with contracting
                               considerations and where they infer that such incentives have induced managers to choose
                               obligation-reducing assumptions, they treat $1 of reported obligation as if it were an obligation of
                               more than $1. These findings suggest that analysts recognize managers' use of assumptions that
                               are not justified by the firm's operating environment and that they discount the effect of those
Improving 401(k)    BE, IN
Investment Return

Is it Time to       IN, IM     Demand for LT Corporate Bonds will Promote Issuance
Immunize?                      We think it more likely now, with the flattening yield curve and narrowing credit spreads, that this
                               strong demand for long duration corporate bonds may eventually be met by supply. A flattening
                               yield curve and contracting corporate bond spreads make it more difficult for managers to justify a
                               preference for short-term borrowing and will likely entice them to strongly consider releveraging
                               the balance sheet to take advantage of a higher interest tax shield, make opportunistic share
                               repurchases and acquisitions to drive EPS growth.
Issue Debt to Fund  AC, PF     We put forth the financial merits of corporations issuing unsecured debt and using the proceeds to
Plan Deficits and              fund their defined benefit (DB) pension plan deficit.
Capitalize on the
Jensen and Meckling FE         This paper is aimed at exhibiting the underlying game structure of Jensen and Meckling (1976)
30 years after: A              equity model with agency cost. Beside the simplification of the proofs, this approach highlights
game theoretic view            the strategic interaction between the owner-manager and the minority shareholders. Analytical
                               characterization of the equilibrium size of the firm with agency cost is found and the monitoring
                               expenses are rigorously introduced.
        Title        Subject(s) abstract

Judgment under        BE       Many decisions are based on beliefs concerning the likelihood of uncertain events such as the
Uncertainty:                   outcome of an election, the guilt of a defendant, or the future value of the dollar. These beliefs are
Heuristics and Biases          usually expressed in statements such as "I think that ...," "chances are ..." "it is unlikely that ...,"
                               and so forth. Occasionally, beliefs concerning uncertain events are expressed in numerical form
                               as odds or subjective probabilities. What determines such beliefs? How do people assess the
                               probability of an uncertain event or the value of an uncertain quantity? This article shows that
                               people rely on a limited number of heuristic principles which reduce the complex task of assessing
                               probabilities and predicting values to simpler judgmental operations. In general, these heuristics
                               are quite useful, but sometimes they lead to severe and systematic errors.
Knowledge, Wisdom BE, FE       ESSAY
or Understanding
Loser's (The) Game IN          This article presents information for investment managers on how to win the money management
                               game. The author's experience with very bright and articulate investment managers is that their
                               skills at analysis and logical extrapolation are very good, often superb, but that their brilliance in
                               extending logical extrapolation draws their own attention far away from the sometimes erroneous
                               basic assumptions upon which their schemes are based. Major errors in reasoning and exposition
                               are rarely found in the logical development of this analysis, but instead lie within the premise
                               itself. To win the game, a few specific things should be considered. First, the manager should be
                               sure that he is playing his own game, he should know his policies very well and should play
                               according to them all the time. Second point is to keep things simple i.e. make fewer and perhaps
                               better investment decisions and simplify the professional investment management problem. And
Making Financial     FE        FINANCIAL ECONOMICS IS DEVELOPING at a blistering pace: the instruments, the
Economic Sense of              technology, the applications, the size of the market – even the jargon. Many actuaries, especially
the Future                     those who qualified ‘in the last century’, have had no grounding in this now fundamental subject
                               which is standard material for current students.
Making Investment     IN, RK   Many participants in self-directed retirement plans (401k, IRA, etc.) do not know enough about
Choices as Simple as           investing to choose rationally among alternatives. Others may know enough, but find it unpleasant
Possible:                      or too time-consuming. Target-date funds (TDFs), also known as life-cycle funds, are being
An Analysis of Target          offered as a simple solution to their dilemma. A TDF is a “fund of funds” diversified across
Date Retirement                stocks, bonds, and cash with the feature that the proportion invested in stocks is automatically
Funds                          reduced as time passes. Empirical evidence suggests that a simple TDF strategy would be an
                               improvement over the choices currently made by many uninformed plan participants. This paper
                               explores one way to achieve an even greater improvement.
Market (A) is Needed PG        Pension claims could and should be traded. This would increase welfare by reducing
in Pension Claims              beneficiaries’ risks and give sponsors an incentive to fund schemes properly.
        Title         Subject(s) abstract

Merton Miller         FE    Merton Miller was at the center of the transformation of academic finance from a descriptive field
                            to a science. His principal contribution to this transformation was the introduction of arbitrage
                            arguments which underlie most theoretical contributions in finance and remain central to the way
                            financial economists analyze finance problems to this day. These arbitrage arguments underlie his
                            and Franco Modigliani's famous irrelevance propositions.
Modern (A)           PF,    This chapter explores the modern thinking behind asset and liability modeling for the
Perspective on       IN,AC quintessential "long-term institutions", namely defined benefit pension schemes and life insurance
Institutional               funds. The conclusion found here is that, although long-term institutions have developed their
Investment Policy           own unique methods of asset and liability management, in reality the management principles
                            should be the same as those applying to other financial institutions (such as banks), or indeed to
                            the Treasury function of non-financial institutions (such as industrial companies). The
                            ramifications of this conclusion extend well beyond asset and liability modeling alone, and have
                            profound implications for unified accounting, regulation and supervision of all institutions, as
                            well as for the roles of actuaries, accountants, analysts and professional risk managers.
Modern Valuation     FE, PF This paper describes techniques for valuing cashflows generated within a stochastic projection
Techniques                  model on a market consistent basis.
                            Traditionally actuaries value cashflows using deterministic calculations or projection of the
                            cashflows stochastically and discounting at a risk-adjusted raate. We advocate using deflators to
                            value cashflows. Deflators are consistent with economic principles and, where the model is
                            calibrated to the market, wiill produce market-consistent valuations.
Morris Review of the AS     In March 2004 the Government asked Sir Derek Morris to undertake a wide-ranging independent
Actuarial Profession        review of the actuarial profession. The background to the review was Lord Penrose's Inquiry into
                            the Equitable Life, which highlighted a number of issues and concerns with the actuarial
                            profession. The review has focused on three main areas: the extent of choice and competition in
                            the market for actuarial services, the current regulatory framework for members of the actuarial
                            profession, and the role and future institutional status of the Government Actuary's Department
Nature (The) of Risk BE, RK Those in behavioral finance and psychology who study decision making have long known that
                            risk appetite varies considerably among individuals. It generally has been the theory that people
                            will accept larger risks to avoid losses than to achieve gains, even when the choices are
New York City Story IN, IM The man responsible for determining the liabilities of New York City's public sector pension
                            system wants to move to market-based valuation, but the move may be controversial.

Next (The) Savings    AC, PG With that as the backdrop, we, along with many investors, have lots of questions for the PBGC,
and Loan Crisis?             including: Are we facing the next savings and loan crisis? What are the biggest flaws in the
                             pension system today? For how many more years can the PBGC continue to pay pension benefits?
                             Could we see pension plans start shifting asset allocations toward fixed income? Where does the
                             PBGC stand in line in a bankruptcy?
         Title         Subject(s) abstract

Noisy (The) Market'    BE     If you are a fan of indexing, as I and so many other investors are, you are no longer trapped in
Hypothesis                    capitalization-weighted indexes which overweight overvalued stocks and underweight
                              undervalued stocks. Devotees of value investing who are searching for a simple, low-cost indexed
                              portfolio in which to hold their stocks need wait no longer. Fundamentally weighted indexes are
Not Such a Great      FE, TR Tension is often observed between the theoretical and the applied branches of a science. While the
Controversy:                  subject of study is the same, the theoretician and practitioner have differing motivations, take
Actuarial Science and         different approaches and judge from different aesthetics. One is deductive and the other inductive.
Financial Economics           The theoretician seeks simplifying and unifying models while the experimenter or practitioner
                              values models with high fidelity to the underlying data generating process.
Off-Balance-Sheet     AC, MV Yesterday, the SEC released its long-awaited report on off-balance-sheet activity to Congress and
Activity Back in the          the President as required by Sarbanes-Oxley. In the report, over 100 SEC staffers dug through the
Spotlight                     filings for a sample of 200 companies, including the 100 largest companies by market cap as of
                              December 31, 2003. The report focused on a range of topics with potential off-balance-sheet
                              implications, including leases, pensions, other postretirement employee benefits (OPEB),
                              contingent liabilities, derivatives, contractual obligations, and special purpose entities, among
On the Risk of Stocks PF, IN This paper examines the proposition that investing in common stocks is less risky the longer an
in the Long Run               investor plans to hold them. If the proposition were true, then the cost of insuring against earning
                              less than the risk-free rate of interest should decline as the length of the investment horizon
                              increases. The paper shows that the opposite is true even if stock returns are “mean-reverting” in
                              the long run. The case for young people investing more heavily in stocks than old people cannot
                              therefore rest solely on the long-run properties of stock returns. For guarantors of money-fixed
                              annuities, the proposition that stocks in their portfolio are a better hedge the longer the maturity of
Overview:             DE, TR, We offer a brief analysis of why the traditional DB pension plan appears to be abandoned in favor
Developments in Risk RK       of DC plans. We also discuss some key risks that both DC and DB plans convey upon plan
Management for                members, and we highlight some of the ways recommended by contributors to this volume, for
Retirement Security           managing these retirement risks.
Pension Actuary's     PF, TR
Guide to Financial

Pension Deficits: An   PF, FF     In this article, we began with considering an economy without governmental guarantees for
Unnecessary Evil                  pension funding. We found that transparency should lead to voluntary full funding. Otherwise,
                                  employers and employees would have inefficient compensation contracts that exposed employees
                                  to risk that they could not diversify. We then introduced a guarantee program and found that it
                                  reversed the main incentive for full funding. We noted that insufficient funding, however, enables
                                  weak or irresponsible plan sponsors to dip into the pockets of other sponsors—and perhaps of
                                  taxpayers. So, the government that includes a guarantee program must require plan sponsors to
                                  fund their plans; that is, it must compel behavior that would occur naturally in an unregulated,
        Title         Subject(s) abstract

Pension Design and BE
Chap. 1: Lessons
from Behavioral
Finance for
Pension Funding: A PF           An important prerequisite for insights into the future of pension plan funding is a sense of its
Historical Perspective          history. This includes not only the history of traditional topics like actuarial cost methods and
                                assumptions, and the history of past inquiries into the dynamic and stochastic nature of pension
                                costs, but also the perceptions and concerns of pension actuaries of the past. The purpose of this
                                paper is to present this historical perspective.
Pension Reform        IN, MF    The Bush administration’s pension reform proposal could prompt more than $200 billion in assets
Spells $200B Fixed              to switch from equity to fixed income. That’s one conclusion as actuaries, plan sponsors and
Income Shift                    analysts have weighed in this week on the possible effects of the proposal.
Pension Valuation     TR, AC    Revamping the methodology for taking defined benefit pension plans into account in corporate
Needs More                      valuations addresses only a symptom of the underlying problems. The price-earnings multiple is
Disclosure, Not a               itself a deeply flawed methodology for valuing companies. Bader notes that "[t]he price-earnings
New Formula                     (P/E) multiple is the most familiar valuation tool. . . . " But he offers no other reason for making
                                the use of this tool the centerpiece of his analysis.
Pensions and Capital PF         This paper considers the pension plan as part of the capital structure of the sponsoring employer.
Structure:                      This enables lessons from financial theory concerning capital structure to be used to answer the
Why Hold Equities in            question "what assets should a pension fund hold?". The standard Modigliani-Miller framework is
the Pension Fund?               expanded on to consider the implications of corporate tax. This leads to the conclusion that bond
                                investment for pension plans has tangible advantages over holding risky assets (e.g. equities). The
                                paper considers a case study of the pension plan of The Boots Company, a UK pharmacy retailer
                                with a pension fund of around £2.3bn ($3.5bn), where these ideas were put into practice. Finally
                                the paper discusses the value released to shareholders and the extra security members of the
                                pension fund have derived from putting theory into practice.
Primer (A) in         FE        This paper is divided into three parts. Taken together, the three parts intend to provide the reader
Financial Economics             with an overview of the first 101 years of financial economics, with particular attention on those
                                developments that are of special interest to actuaries. In Section 1, S.F. Whelan attempts to
                                capture the flavour of the subject and, in particular, to give an overview or road map of this
                                discipline, highlighting actuarial input. In Section 2, D.C. Bowie gives a concise and self-
                                contained overview of the Modigliani and Miller insights (or MM Theorems, as they are often
                                known). In Section 3, A.J. Hibbert considers the novel option pricing method proposed by Black,
                                Merton, and Scholes. These two insights are highlights of this new science, and, in both cases,
         Title        Subject(s) abstract

Primer (A) on         PF, IN    Within the past few years two broad themes have had significant impact on many institutional
Portable Alpha                  investment portfolios. First with forward-looking capital market assumptions for equity and fixed
                                income returns lower than past performance, institutional investors area increasingly turning to
                                alternative investments such as hedge funds and real estate to create an efficient portfolio.
                                Second, fiduciaries have increased their focus on controlling the management fees and tracking
                                error of their efficient traditional asset class allocations through passive investment strategies.
                                Can portable alphas address both of these themes simultaneously?
Principles (The) of   PF        The key to understanding the financial implications of corporate pension plans … is the economic
Corporate Pension               value of claims on a pension plan. Beneficiaries have regarded their claims as a bona fide
Finance                         retirement fund. On the other hand, sponsoring companies, their actuaries, their accountants, their
                                creditors, and their stockholders have regarded pension claims lightly. Thus corporate pension
                                plans have traditionally had a "something for nothing" aspect about them, whereby their value to
                                beneficiaries seemed to exceed the financial burden imposed on the sponsoring company. What
Prospect Theory:      BE        This paper presents a critique of expected utility theory as a descriptive model of decision making
An Analysis of                  under risk, and develops an alternative model, called prospect theory. Choices among risky
Decision under Risk             prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility
                                theory. In particular, people underweight outcomes that are merely probable in comparison with
                                outcomes that are obtained with certainty. This tendency, called the certainty effect contributes to
                                risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses.
                                In addition, people generally discard components that are shared by all prospects under
                                consideration. This tendency, called the isolation effect, leads to inconsistent preferences when
                                the same choice is presented in different forms. An alternative theory of choice is developed, in
                                which value is assigned to gains and losses rather than to final assets and in which probabilities
                                are replaced by decision weights. The value function is normally concave for gains, commonly
Psychology and         BE       Thaler challenges financial axioms of rational expectations and expected utility maximization
Financial Markets:              using the results from the study of human decision making. These include paradoxes (to rational
Richard H. Thaler               theory) known by short hand names such as "overconfidence," "anchoring and adjustment,"
Addresses the                   "mental accounting," and "framing."
Investment Section
Puzzling (The) State AC         Jensen of Harvard Business School condemns "managing earnings" as a form of lying. This is an
of Low-Integrity                example of the agency problem: How to recognize and control the problems arising when the
Relations Between               interests of managers are not aligned with those of shareholders.
Managers and Capital
Rationale (The) of the IN, FE   Portfolio analysis based on mean and variance was introduced by Harry Markowitz (1953) more
Mean-Standard                   than 20 years ago. This method of analysis has become extremely popular, partly through
Deviation Analysis:             Markowitz's own book (1959), and also through the work of James Tobin. The method has been
Comment                         severely criticized, and I am among the critics who have argued that mean-variance analysis must
                                be seen as a n intellectual exercise, useful only if it leads to insight into the real problems of
        Title         Subject(s) abstract

Rationale (The) of the IN, FE   Rebuttal of Borch' article with the same main title
Deviation Analysis:
Reply and Errata for
Original Article
Reaffirming Pension TR, PF      The pension actuarial community has been in the process of revisiting the fundamental principles
Actuarial Science               of pension actuarial science. Bader [2001] and Bader-Gold [2003] have raised important
                                questions about the validity of the actuarial pension model. They have urged the profession to
                                undertake a major revision of the model in light of financial economics. The works of Bader and
                                Gold, as well as several other actuaries and economists, have become the subject of numerous
                                discussions. The paper of Bader and Gold [2003] offers a comprehensive list of grievances that
                                the financial economics community has had with various methodologies utilized by the pension
                                actuarial community. The negative role of ERISA enactment, numerous shortcomings of statement
                                FAS87, the importance of understanding of financial economics – these and several others points
                                are very well taken. However, the paper contains several declarations that should be disputed. The
Reforming the         DE, PF    actuarial pension model certainly needs further development, but it needs no reinvention.
                                DB pensions should remain as one of the compensation tools available to workers and
Defined-Benefit                 management as they work out the value-maximizing means of delivering compensation to
Pension System in the           workers. The paper derives the implications of attaching an important caveat to the use of DB
United States                   pensions—namely, that if workers are to be promised annuities by their employers and if
[Preliminary and                taxpayers are to be interposed as third-party guarantors of those annuities, then the pension
incomplete draft]               promise should be essentially free of risk. In the course of bargaining with their employers,
                                workers should of course be careful not to demand too high a fraction of their overall
                                compensation in the form of such risk-free annuities, taking account of whatever Social Security
                                benefits to which they might become entitled. Equity-related compensation and own-firm-risk-
                                related compensation may be complementary elements of the compensation toolbox, but other
                                vehicles aside from DB plans are available for the purpose of giving workers exposure to those
                                forms of risk. The salient common feature of those other forms of compensation is that they all
Reinventing Pension   PF        The 1974 passage of ERISA halted the evolution of the actuarial pension model. This frozen
Actuarial Science               model was unable to incorporate the emerging science of financial economics, which in turn
(including                      revealed fundamental flaws in the model. Contrary to the teachings of financial economics, the
discussions)                    actuarial pension model anticipates expected outcomes without reflecting the price of risk. It then
                                camouflages the risky distribution of outcomes by various smoothings and amortizations.

                                The flawed pension model has caused widespread, though rarely recognized, damage to pension
                                plan stakeholders. This paper illustrates the flaws and the injuries they cause.

                                To protect the pension system and the vitality of our profession, we urge pension actuaries to
                                reexamine and redesign the model. The new model must incorporate the market value paradigm
                                and reporting transparency that is rapidly becoming a worldwide minimum standard in finance.
         Title          Subject(s) abstract

Rethinking Pension      PF, IN    The purpose of this article is threefold. First, we discuss the recent performance of defined-benefit
Liabilities and Asset             corporate pension plans (in 2000 and 2001) and the implications for future corporate earnings.
Allocation                        Second, we address the issues associated with measuring pension liabilities. Finally, we suggest
                                  solutions for dealing with the problem of measuring pension liabilities.
Rise (The) of Liability PF, IN, IMTraditionally, defined benefit pension plan sponsors have managed their plan's investment
Driven Investing                  portfolios from an asset-only perspective, monitoring the value of plan assets while giving
                                  insufficient consideration to the risks and economic sensitivities of the liabilities.
Risk (The) of           PF        Upcoming funding and accounting regulations will limit the ability of pension plan sponsors to
Declining Market Cap              smooth the recognition of investment gains and losses, resulting in better transparency, but more
with Large Pension                volatility. More cost volatility will make short-term budgets harder to manage, and large healthy
Obligations                       companies will need to find a way to either bear or mitigate the risk. Companies that have
                                  experienced a decline in market capitalization, but still retain large pension obligations, will not
                                  be as able to withstand the cost of a sharp decline in funded status. This article will focus on the
                                  pension risk from the standpoint of different companies. Specifically, we’ll examine risk based on
                                  the relative size of the pension obligation to the market capitalization of the plan sponsor.
Risk Transfer in        PF, AC Actuaries and sponsors of public sector defined benefit pension plans agree that each generation
Public Pension Plans              of taxpayers should bear its fair share of the long term plan cost. Actuarial methods and
                                  assumptions are designed to equate expected costs across generations. This paper uses arbitrage
                                  principles to show that equating expected costs unfairly lowers risk-adjusted costs for early
                                  generations and raises them for later generations. The use of expected rather than risk-adjusted
                                  returns on risky assets leads to sub-optimal asset allocations, granting of valuable options (skim
                                  funds), and costly financing strategies such as Pension Obligation Bonds.
Shareholder (The) -     PF, DE In 1980 and 1981, Fischer Black and Irwin Tepper showed that shareholders would gain if
Optimal Design of                 corporate defined benefit pension assets were invested in taxable fixed income securities instead
Cash Balance Plans                of equities. This paper extends this analysis into the cash balance plan arena, concluding that
                                  additional shareholder gains arise when plan liabilities mimic equities. A numerical example
                                  demonstrates that the present value of riskless gains to shareholders can exceed the entire after-tax
                                  value of plan assets. Lack of transparency in actuarial methods and assumptions is shown to
Statement on            PF, MF, Commentary on [1] Discount rate for liabilities, [2] Funding of PBGC guarantees, [3] Valuation
“CORPORATE              AC        of assets and [4] Smoothing of deficits
         Title        Subject(s) abstract

Statement on          AM, BE Prediction markets are markets for contracts that yield payments based on the outcome of an
Prediction Markets           uncertain future event, such as a presidential election. Using these markets as forecasting tools
                             could substantially improve decision making in the private and public sectors.

                                We argue that U.S. regulators should lower barriers to the creation and design of prediction
                                markets by creating a safe harbor for certain types of small stakes markets. We believe our
                                proposed change has the potential to stimulate innovation in the design and use of prediction
                                markets throughout the economy, and in the process to provide information that will benefit the
                                private sector and government alike.

Stocks are Still an   IN, RK    What about underestimated pensions costs? Bears maintain that the market decline confirms that
Oasis                           the return estimates used by most firms on their pension portfolios are far too high. But there is
                                good news and bad news in the market decline. Yes, the value of the pension portfolios has
                                fallen. As ridiculous as a 12% return estimate was at the market peak in March 2000, a 6% to 7%
                                return estimate is far too low from current stock market values, which I believe will approach, if
                                not exceed, the 7%-plus inflation that has been realized over all long-term periods.
Stocks Not For the    IN, RK    The underpinning of Bodie’s investment philosophy is that stocks are far riskier than advisors are
Long Run                        leading their clients to believe. Too many portfolios, he says, are built on the fundamental belief
                                that over the long run stocks are almost a sure bet. This view holds that if your investment horizon
                                is ten years or more, stocks are a safe investment play and a better investment than bonds.
Stop Thief!           IN, IM
Successful Defined    MF, PF, Recent meetings on financial economics have promoted the idea of an all bond asset allocation.
Benefit Plans Cost    IN      Financial economics calls us to take a corporate-centric, rather than plan-centric approach to
Less with Bonds               pension asset allocation selection. However, we can also learn about the risk of investing in stocks
                              by using some traditional actuarial tools, like measuring the “probability of ruin”.
                              It is commonly known that actuarial liabilities and normal costs are lower using a discount rate
                              based on higher equity returns as compared to lower bond returns. However, if we factor in the
                              probability of ruin (which we learned during our actuarial exams, but rarely use with pension trust
                              funds), we will find that a plan than avoids ruin costs less with a large bond asset allocation.
        Title         Subject(s) abstract

Tax (The)              PF, MF    Because they are worth more when times are good and less when times are bad, common stocks in
Consequences of                  the pension fund add to the sponsoring firm's leverage. They cause contributions to a pension
Long-Run Pension                 fund to be high just when the firm can least afford to pay them. Conversely, bonds in the pension
Policy                           fund will make it easier for the firm to avoid default on its own bonds when times are bad all over:
                                 The more bonds a pension fund buys, the more the firm can borrow.

                              The tax treatment accorded the pension fund differs notably from that accorded the firm. Some
                              have argued that a firm can capitalize on the difference by accelerating the funding of its pension
                              plan. The benefits of full funding are wasted, however, unless the added contributions to the fund
                              are invested in bonds; higher pension contributions now mean lower contributions later, hence
                              higher taxes later. The benefits come from earning, after taxes, the pretax interest rate on the
Taxation and           PF     This paper focuses on the impact of taxes on optimal corporate pension policy. The analysis is
Corporate Pension             based upon an integration of corporate and individual shareholder considerations. The major
Policy                        conclusions are that a company should fully fund its pension plans and should invest the pension
The Cost of Capital, FE       What is the "cost of capital" to a firm in a world in which funds are used to acquire assets whose
Corporation Finance           yields are uncertain; nada in which capital can be obtained by many different media, ranging from
and the Theory of             pure debt instruments, representing money-fixed claims, to pure equity issues, giving holders only
Investment                    the right to a pro-rata share in the uncertain venture? This questions has vexed at least three
                              classes of economists:(1) the corporation finance specialist concerned with the techniques of
                              financing firms so as to ensure their survival and growth; (22) the managerial economist
                              concerned with capital budgeting; and (3) the economic theorist concerned with explaining
The U.S. Pension       IN, DE This report, therefore, attempts to provide some of the actual data needed to analyze the potential
Crisis: Evaluation and        effects of these emerging pension issues properly. It also serves as a reminder that our nation
Analysis of Emerging          boasts a sound, long-term national retirement strategy based on a foundation of core benefits
Defined Benefit               (Social Security and DB pension plans) and flexible benefits (personal savings and defined
Pension Issues                contribution [DC] plans). It is the ratio and health of those two types of retirement programs that
                              allow us to achieve our long-term corporate and societal goals.
Treatment of Pension PF, AC, Pension plans may not quite fit Churchill’s “mystery wrapped in an enigma,” but probably no
Plans in a Corporate MF       other financial activity spanning such a broad spectrum of U.S. business is so little understood
Valuation                     outside the small world of its practitioners.
                              • Corporate pension contributions are governed by the Byzantine rules of the Employee
                              Retirement Income Security Act of 1974 and the U.S. Internal Revenue Code. These rules aim to
                              protect the participants and the Pension Benefit Guaranty Corporation (PBGC) while limiting tax-
                              deductible contributions.
                              • The financial reporting for pension plans is governed by an entirely different set of complex
                              rules set forth primarily in Statement of Financial Accounting Standards No. 87. The resulting
                              expense figures conceal market risk and are irrelevant in assessing the value of the pension plans’
                              sponsors. Until recently, few analysts paid special attention to pension plans.
        Title         Subject(s) abstract

UBS Investment        PF, IN In this report we seek to answer the question of whether a valid case can be made for a zero-equity
Research                     investment strategy by company-sponsored, defined-benefit pension schemes. We analyse the
Pension Fund Asset           financial economics of pension provision and examine the common belief that significant equity
Allocation                   investment adds to shareholder value. This report is NOT about whether equities are currently
                             under or overvalued, nor whether equities will or will not deliver a certain return in the future.
                             Also, the case against equity investment by corporate pension schemes by no means suggests a
                             zero equity allocation by individual investors or public sector schemes. .
Understanding Equity RK, FE, Several recent books and articles have addressed the issue of expected equity returns, with a range
Risk Premium         IN      of opinions—from dourly pessimistic to irrationally optimistic. This article attempts to answer the
                             following questions:
                             • What is equity risk premium?
                             • How should equity risk premium be measured?
                             • Does a constant risk premium provide the best model?
                             • What are reasonable expectations for the future?
Understanding the    FE, MV This paper discusses the construction of the corporate bond yield curve and possible applications
Corporate Bond Yield         to pension valuation. The first part addresses the mathematical theory and tools needed to extract
Curve                        the yield curve from corporate bond data and the issues that arise in contrast to the Treasury yield
                             curve. Next, specific problems concerning the construction of the curve are explored, for example,
                             the number of bonds available, the quality at different durations, etc. In the last part questions
                             arising when applying the yield curve to pension valuation are discussed.
Valuation of Pension FE, MV, This paper will discuss the valuation of lump sums for both funding and FAS 87 valuations,
Obligations with     DE      particularly the selection of appropriate discount rates. Because of the complexity of the
Lump Sums                    requirements for setting discount rates for FAS 87, most of the discussion is with respect to FAS
                             87. Since the mathematical calculations required for exact calculation of lump-sum values may be
                             incompatible with some actuarial valuation systems, the last part of the paper discusses some
                             approaches for approximating the detailed calculations with simplified approaches. This paper
                             shows that reasonable approximations exist to the theoretically correct methodology for valuing
Value (The) of       FE      Should we value an asset at an amount calculated using actuarial discounted cash flows, or at its
Actuarial Values             current market price? Much hinges on this question - the possible answers dictate quite distinct
                             programmes for the development and practice of the valuation of long-term business, and the
                             theory and practice of the associated investment management.
         Title         Subject(s) abstract

Valuing Companies,     PF, AC, Deciding what a company is worth is fundamental to the work of executives, investors, and
Valuing Pension        MV      lenders. Corporate valuations are needed for mergers, acquisitions, sales, spin-offs, initial public
Plans                          offerings, leveraged buyouts, bankruptcies, and investment and lending decisions. For a publicly
                               traded company, a market valuation is readily available, but even then an interested party may
                               want an independent judgment of value. Relying on FAS 87, though, can distort the valuation of
                               companies whose defined benefit pension plans are significant in relation to their overall business.
                               Reliance on reported pension costs, however, can produce errors. Although FAS 87 has drawn
                               much controversy and criticism, its real or alleged defects aren’t the problem here. Rather, folding
                               a conventional pension cost into corporate earnings hinders rather than helps in understanding
                               corporate value. The danger lies in conflating two very different types of earning or
                               expenses—those generated by conventional business operations and those arising from financial
Welfare (The) of       BE      Behavioral finance, a developing field of academic research that emphasizes investor irrationality
American Investors             (and ignorance) and the inefficiency of markets, has been hailed by defenders of the SEC as
                               offering a solid economic rationalization for our vast scheme of federal securities regulations.
                               Even apart from the obvious implications for the regulatory system of ignorance and irrationality
                               on the part of regulators, a closer examination of the logic of behavioral finance leaves little for
                               the pro-regulation crowd to crow about.
What are Corporate     PF, AC Analyses of corporate pension plans often make unstated assumptions about an implicit labor
Pension Liabilities?           contract. An example of the effect of such an assumption is that many mistakenly believe that if a
                               worker’s benefits are tied to final salary, he is protected against inflation until retirement. Also,
                               the value of a worker’s claims is often considered to be independent of the status of the firm’s
                               pension fund. These “implicit contract” assumptions are examined and questioned. The
                               implications of analyzed pension liabilities in a manner consistent with the analysis of other
What is Risk (Part II) IN       Much has been written about the “riskiness” of stocks and the safety of bonds. But the data seems
                               to focus on only the recent history, a time of falling interest rates and capital gains in bonds. Our
                               discussion has a more long-term focus.
What is Risk?          IN      When people seek investment advice, the first response from professionals is usually “How much
                               risk can you take?” The ensuing discussion is then governed by the concept of “risk.” In today’s
                               financial world, however, the definition of risk used by professional financial planners and
                               stockbrokers has become completely divorced from the definition used by most people.
What Pension Scheme BE         Almost every day we read about the serious crisis in final salary pension schemes that has been
Deficits                       largely brought about by the move to the methodology of FRS17 (and its European twin IAS19),
                               in which the yield on long-dated AA corporate bonds is the specified discount rate for liabilities,
                               and assets are taken at market value without any smoothing adjustment. The adverse
                               consequences of this move to FRS17 area numerous and acute: [also includes letter replies]
        Title         Subject(s) abstract

What’s next?—DB        PF, DEIn light of the global demand for financial transparency, we need to wean ourselves and our
plans for the long run       clients from the seductive (but illusory) and addictive advantages of Defined Benefit (DB) plans
                             without weaning them away from DB plans. We must abandon reliance on the “free lunches” that
                             appear to be served up by DB plans and focus instead on substantive virtues. Along the way we
                             will need an endorsement by society (better rules) and we will have to exert our creativity and
Yikes! How to Think PF, RK, IN same issue keeps reappearing. How to deal with the risk associated with equity investments
about Risk?                  when evaluating the financial health of retirement systems? Some experts argue that retirement
                             plans holding equities can make smaller funding contributions than those invested primarily in
                             bonds. After all, stocks yield 7 percent, after inflation, and bonds only 3 percent. Nonsense, say
                             others. The higher expected returns on equities reflect their greater risk. Any serious financial
                             evaluation of retirement arrangements must “risk-adjust” these returns. After accounting for risk,
                             the contribution needed today to fund future pension obligations is the same regardless of whether
Title   Subject(s) abstract
         Title                                                      comment
                                                                                                              Significance   Grade   Entry
1/n (The) Pension                                                                                                                        18
Investment Puzzle

Accounting/Actuarial                                                                                                                     65
Bias Enables Equity
Investment by
Defined Benefit
Pension Plans
Actuaries discuss the                                                                                                                    81
principles of financial
economics of pension

Adding an Annuity to Kiosks and phone centers can only help participants when better options are available.                             119
Improve Defiined
Contribution Plan    Discusses liability driven investing (LDI).
Adequate Funding for                                                                                                                     86
a Pension Plan

Agency Problem                                                                                                                           47

An Actuary Looks at                                                                                                                      90
Financial Insurance
         Title                                                         comment
                                                                                                                                 Significance   Grade   Entry
Are Stocks "Too          Use of "prevailing interest rates" in discounting cash flows assumes those rates provide an accurate                     A             6
High"?                   yardstick. But the bond market is subject to emotions just as are equity and other markets. Ron
                         demonstrates that relative value signals using prevailing interest rates were wrong for 20 years and
                         that the signals would have been correct if instead of market rates the discounting was based on long
                         term "bond" rates of inflation plus 3% real return.

Asset-Liability                                                                                                                                             92
Professional Specialty

Assumed Rates of       Example of analysis using pension finance concepts, which are explained in the paper. Early draft.                                   78
Discount for           Perhaps a later version exists.
Valuations of Publicly
Sponsored Defined
Benefit Plans

Behavioral Economics It says something interesting about the field of economics that there is a sub-field called behavioral           C          A          25
                     economics. Surely all of economics is meant to be about the behavior of economic agents, be they
                     firms or consumers, suppliers or demanders, bankers or farmers.

Behavioral Finance       An introduction to behavioral concepts.                                                                                            68
         Title                                                      comment
                                                                                                                            Significance   Grade   Entry
Bond market             Example of analyst work product based on pension finance. Impact of pension finance on new               C                     14
implications of the     directions for Congress, FASB, Credit rating agencies and investors.
pension reform

Case (The) Against                                                                                                                                     88
Stock in Corporate
Pension Plans

Case (The) against                                                                                                                                    107
Stock in Public
Pension Funds

Cashing In:                                                                                                                                            76
Do Aggressive
Funding Policies Lead
to Higher Credit

Cognitive Dissonance For actuaries who dismiss the Great Controversy as mere academic musings not worthy of a response,          A          B          28
                     Shuttleworth declares traditional actuarial science is based on "untruths" and that actuaries who do
                     not follow the tenets of financial economics are "wrong-headed." Wall street analysts, for example,
                     view traditional pension methods this way and tend to dismiss measurements which are not based on
                     future cash flows discounted with a yield curve.
         Title                                                       comment
                                                                                                                               Significance   Grade   Entry
Comprehensive (A)   Identifies and addresses solutions for the "perverse unintended consequences" of Erisa. A useful                            B             8
Defined Benefit     template to compare to actual reform.
Pension Plan Reform

Conceptual                                                                                                                                                63
Framework -

Corporate Pension                                                                                                                                         93
Funding Policy

Cross (The) Section of More evidence of the incompleteness of the rational functions of the financial economics models.                                  115
Common Stock
Defined Benefit        An example of analysis based on financial economic theory. The conclusion is that relative volatility                              57
Pension Plans’         in liability and asset values to change in interest rate is dangerously mismatched.
Interest Rate
Exposure at Record

Discounting Pension                                                                                                                                       89
Liabilities under the
New SEC Rules
         Title                                                        comment
                                                                                                                                Significance   Grade   Entry
Does An Actuarial                                                                                                                   B+                     46
Bias Lead To Equity

Draft Editorial        This draft essay might be titled "Reinventing Accounting" as it critiques the use of current financial                   B+          7
                       statements by analysts.

Durational (Select &                                                                                                                                      64
Ultimate) Discount
Rates for FAS 87 &
106 Valuations
Earnings                                                                                                                         B                        41
                      A study to measure the impact of the agency problem related to pension accounting. This paper is a follow up to the Coronado and Sharpe (2003) paper.
Manipulation and
Investment Decisions:
Evidence from
Sponsored Pension

Economics (The) of It is interesting that this particular paper cannot be found in Russell's web pages.                                                    73
Defined Benefit
Pensions and the
Rationality of Pension
Funding Strategies
         Title                                                       comment
                                                                                                                                Significance   Grade   Entry
Equity Duration –   Duration, or sensitivity of price to interest rate fluctuation, of equities is ignored largely because of                             105
Updated Duration of the difficulty of not having a final maturity date or known dividend payments. This realization poses
the S&P 500         the question, "what difficult to deal with issues are ignored in a bond duration calculation?" One
                    example, fluctuating credit quality.
Equity Risk Premium A transcription of a conference of well known economists, statisticians and investment professionals.            B          B          29
Forum               Summary comments on pages 108 through 113 provide much information from this conference. Also
                    a good bibliography at the end.

                       A "theoretical foundations" essay by Richard Thaler presents the Behavioral Economics view of the
                       equity risk premium at pages 2 through 7.

Equity Risk Premium:                                                                                                                                      116
Expectations Great
and Small

Evaluating the Long-                                                                                                                                       60
Term Risk of Equity
Investment in a
Portfolio Insurance
         Title                                                  comment
                                                                                           Significance   Grade   Entry
Evolving Pension                                                                                B                     21
Actuarial Science

Final Report of the                                                                                                   49
Task Force on
Pension Funding

Financial Economics Vancouver Great Controversy                                                 B                     12
and Pension         Current Actuarial Practice in Light of Financial Economics Symposium
The U.K. Experience

Financial Economics                                                                                                   69
for Pension Plans

Financial Economics:                                                                            B          A         108
A Wake-up Call
        Title                                                        comment
                                                                                                                              Significance   Grade   Entry
Financial Economics: The theoretical developments were made but not disseminated beyond the insular province of the                            A        112
Actuaries'           actuarial community. When later rediscovered by non-actuarial mathematicians the connection to
Contributions        real world problem solving was no longer apparent. Theoretical developments continued
                     unchallenged by real data ultimately leading to the presumptive dismissal ("reinventing") of
                     traditional actuarial methods and models. In hindsight this condemns the self administered
                     educational system chosen by the actuarial organizations over maintaining an applied science niche
                     within the mathematics departments of the higher educational academy.
Fixing the Pension                                                                                                                            B-          1
Plan Funding Rules

Foundations of         2002 Nobel Laureates in Economics                                                                          A+          B          27
Behavioral and
Experimental           Rational utility functions are modified to take into account Prospect Theory of behavioral economics
Economics: Daniel      on page 17. Also, a good source of citations of important papers.
Kahneman and
Vernon Smith

Framework (A) for                                                                                                                                        87
Corporate Retirement
Funding Policy

Funding defined        Can traditional DB plans exist if solvency is measured using pension finance?                                                     15
benefit pension
        Title                                                        comment
                                                                                                                              Significance   Grade   Entry
Getting the Models   Experimental Economics at work.                                                                               B           A        118
Right': How to Value
Hard-to-Price Assets

Group Variable        Included at the end of the essay are several points of view or questions posed by people who read the                              72
Annuity Pension Plan: article. Some of these are responded to by Lowman.
An Optional Plan
Proposal in Response
to Financial
Economics Challenge
to DB Plans

Herbert Simon                                                                                                                      A                     52
Interview & Obituary
Hindsight                                                                                                                                                51

How Much Money are                                                                                                                                       35
You Willing to Lose
for a Theory?
How to Stop the     Practical comments on the public policy issues of pension funding.                                                                   70
         Title                                                     comment
                                                                                            Significance   Grade   Entry
Impact (The) of Fair                                                                                                   62
Value Accounting on
the “Normal” Rate
Impact (The) of                                                                                                        66
Pension Assumptions
on Firm Value

Improving 401(k)                                                                                                       34
Investment Return

Is it Time to          Example of analyst work product based on pension finance.                 C                      9

Issue Debt to Fund  An example of the practical application of financial economic theory.        A                     39
Plan Deficits and
Capitalize on the
Jensen and Meckling Agency costs                                                                                      102
30 years after: A
game theoretic view
        Title                                                        comment
                                                                                                                          Significance   Grade   Entry
Judgment under        Key paper                                                                                               A+                     30
Heuristics and Biases

Knowledge, Wisdom                                                                                                                                    33
or Understanding
Loser's (The) Game                                                                                                                                  100

Making Financial        Continuing education via Certificate in Practical Financial Economics, or CPFE, obtained after                               75
Economic Sense of       twelve units of study material.
the Future

Making Investment                                                                                                                                   106
Choices as Simple as
An Analysis of Target
Date Retirement

Market (A) is Needed I find the opening paragraph in this article to be misleading in the extreme. I believe the proper                              17
in Pension Claims    reference in the footnote should be to PBGC's Pension Insurance Data Book (2003). It does indeed
                     point out that underfunding is rampant -- WITHIN THE SUBSET of plans which made claims
                     against the PBGC! Well, duh. These 3,277 plans (through 2003) amount to a tiny fraction of the
                     more than 160,000 plan terminations since 1974.
        Title                                                        comment
                                                                                                                              Significance   Grade   Entry
Merton Miller                                                                                                                                            54

Modern (A)                                                                                                                         A                     48
Perspective on
Investment Policy

Modern Valuation       If you want the theory and formulas, this is your paper. The "examples" are sketches and outlines of                             120
Techniques             considerations, not practical applications.

Morris Review of the Comprehensive review of the actuarial profession in the United Kingdom.                                                             10
Actuarial Profession

Nature (The) of Risk                                                                                                                                     53

New York City Story                                                                                                                                      19

Next (The) Savings     Interview with Brad Belt. Total 22 pages.                                                                                         44
and Loan Crisis?
         Title                                                         comment
                                                                                                                                  Significance   Grade   Entry
Noisy (The) Market'                                                                                                                    C           A         22

Not Such a Great      Practical validity of theoretical ideas of finance is discussed, followed by illustration of the problems                   A         111
Controversy:          of complexity in modeling real world systems.
Actuarial Science and
Financial Economics

Off-Balance-Sheet                                                                                                                                            45
Activity Back in the

On the Risk of Stocks                                                                                                                 A+          C          24
in the Long Run

Overview:            The opening chapter of The Pension Challenge, Risk Transfers and Retirement Income Security.                      B          A          40
Developments in Risk
Management for
Retirement Security
Pension Actuary's    Replace this file with pdf version after released by SOA                                                          A          B+         20
Guide to Financial

Pension Deficits: An                                                                                                                              B+          2
Unnecessary Evil
         Title                                                        comment
                                                                                                                       Significance   Grade   Entry
Pension Design and        A good example of the application of behavioral concepts to plan design.                                                32
Chap. 1: Lessons
from Behavioral
Finance for
Pension Funding: A                                                                                                                                95
Historical Perspective

Pension Reform           Example of analyst work product based on pension finance.                                          C                     13
Spells $200B Fixed
Income Shift
Pension Valuation                                                                                                                                 83
Needs More
Disclosure, Not a
New Formula

Pensions and Capital                                                                                                        A                     11
Why Hold Equities in
the Pension Fund?

Primer (A) in            Most historical reviews start with academic papers from the 1950s. This one points to 1900.        A                     38
Financial Economics
         Title                                                        comment
                                                                                                                                Significance   Grade   Entry
Primer (A) on          Lower nominal capital market assumptions do not necessarily mean lower real returns. Although the                         B        110
Portable Alpha         current fashion (or fascination ) with fixed income may be leading to lower real returns as prices are
                       bid higher.

Principles (The) of                                                                                                                                        94
Corporate Pension

Prospect Theory:       Key paper                                                                                                    A+                     31
An Analysis of
Decision under Risk

Psychology and                                                                                                                                             91
Financial Markets:
Richard H. Thaler
Addresses the
Investment Section
Puzzling (The) State                                                                                                                 B          C          37
of Low-Integrity
Relations Between
Managers and Capital
Rationale (The) of the Skewness in Borch' discussion could be contained in the behavioral terms added to the rational utility functions.                  113
Deviation Analysis:
         Title                                                        comment
                                                                                                                                 Significance   Grade   Entry
Rationale (The) of the                                                                                                                                     114
Deviation Analysis:
Reply and Errata for
Original Article
Reaffirming Pension The separation of pension actuarial science and its methodology from FASB, Erisa, IRS, and other                             A           3
Actuarial Science      (misinterpretations is clarifying.

Reforming the         Three axioms are stated in the introduction: (1) the pension promise should be essentially free of risk;                              77
Defined-Benefit       (2) taxpayers should be fully compensated for bearing any residual risk; and (3) healthy sponsors
Pension System in the should not have to subsidize unhealthy ones .
United States
[Preliminary and
incomplete draft]

Reinventing Pension                                                                                                                  A+          B+         26
Actuarial Science
         Title                                                         comment
                                                                                                                               Significance   Grade   Entry
Rethinking Pension                                                                                                                                        58
Liabilities and Asset

Rise (The) of Liability                                                                                                                        B         109
Driven Investing

Risk (The) of                                                                                                                                             99
Declining Market Cap
with Large Pension

Risk Transfer in                                                                                                                                          59
Public Pension Plans

Shareholder (The) -       Example of analysis using pension finance concepts, which are explained in the paper. Early draft.                              79
Optimal Design of         Perhaps a later version exists.
Cash Balance Plans

Statement on                                                                                                                                              50
         Title                                          comment
                                                                  Significance   Grade   Entry
Statement on          Experimental Economics at work.                                       117
Prediction Markets

Stocks are Still an                                                                          67

Stocks Not For the                                                                           43
Long Run

Stop Thief!                                                                                  36
Successful Defined                                                                           71
Benefit Plans Cost
Less with Bonds
        Title                                                        comment
                                                                               Significance   Grade   Entry
Tax (The)                                                                                                 96
Consequences of
Long-Run Pension

Taxation and                                                                                              98
Corporate Pension
The Cost of Capital,                                                                                      97
Corporation Finance
and the Theory of

The U.S. Pension       Unintended consequences of pension finance?                  B                     42
Crisis: Evaluation and
Analysis of Emerging
Defined Benefit
Pension Issues

Treatment of Pension                                                                                      56
Plans in a Corporate
        Title                                                      comment
                                                                                                                        Significance   Grade   Entry
UBS Investment                                                                                                                                     74
Pension Fund Asset

Understanding Equity To discuss equity risk premium, common understanding of defined terms is essential. This article                              61
Risk Premium         makes that clear and presents the commonly used definitions.

Understanding the                                                                                                                                  84
Corporate Bond Yield

Valuation of Pension                                                                                                                               85
Obligations with
Lump Sums

Value (The) of                                                                                                                                     55
Actuarial Values
         Title                                                        comment
                                                                                                                                  Significance   Grade   Entry
Valuing Companies,                                                                                                                                           82
Valuing Pension

Welfare (The) of       Very readable.                                                                                                  C          A+         23
American Investors

What are Corporate     A criticism of "projected benefit" and "ongoing plan" assumptions, often implicit, in pension liability                              103
Pension Liabilities?   valuation

What is Risk (Part II) Muhlenkamp defines "risk" as the probability of losing purchasing power. This essay questions                              A-          5
                       whether one year periods are appropriate to measure volatility. It proposes fundamental reason why
                       equity returns exceed bond (or any other) investment class which is unrelated to statistical variances.
What is Risk?          Muhlenkamp defines "risk" as the probability of losing purchasing power. Statistics are used because                       B           4
                       they are available, not necessarily because they are informative. Outside of short term or specifically,
                       time diversification allows fundamental trends to override short term volatility. Investment diversity
                       depends on spreading investments over several enterprises, not over security classes.
What Pension Scheme                                                                                                                                         101
         Title                                                        comment
                                                                                                                     Significance   Grade   Entry
What’s next?—DB                                                                                                                                 80
plans for the long run

Yikes! How to Think      " … most people have little ability to manage the risk … in equities …"                                               104
about Risk?
                         The essay comments on private account proposals for Social Security.

                         This statement implies most people can better manage the risks involved with fixed income
Title   comment
                  Significance   Grade   Entry
The Great Controversy Symposium - June, 2003 - Vancouver                                                                                       abstract
         Title                  Author    Subject(s)      filename (all are .pdf)

Pension Funds - A        Jon Exley        PF           openingremarks_1             Classical financial theory offers a normative prescription for pension fund asset allocation that rejects the widely adopted
Company Manager's        Shyam Mehta                                                portfolio selection theory favoured by practitioners in favour of close asset and liability matching. In this paper we search for
View                     Andrew Smith                                               positive theory to explain actual observed behaviour. We question whether the classical theory can accommo date this actual
                                                                                    observed behaviour by allowing only for issues affecting the principals (pension scheme members and sponsoring company
                                                                                    shareholders) and conclude that it is unlikely that a full explanation can be obtained by this analysis alone. Instead we propose
                                                                                    that the roles of agents and the interests of corporate insiders need to be considered in order to explain observed behaviour. We
                                                                                    argue that the agents involved may themselves be behaving quite rationally in terms of their own welfare and this provides a
                                                                                    simple explanation for actual behaviour without rejecting the underlying principles of classical theory.
The reporting of the      Isabel Gordon   AC           openingremarks_2             This paper compares the development of the reporting for pension commitments by the sponsoring employer in Australia to
defined benefit cost in                                                             the US and the UK. In Australia, there are no measurement rules concerning the calculation of the periodic cost to the defined
the sponsor's books in an                                                           benefit fund (DBF) provided by the sponsor. By contrast, in the USA and UK accounting standards on this topic were
unregulated setting:                                                                introduced in 1987, and an international accounting standard first promulgated in 1983. The flexibility of accounting
Australia compared to                                                               treatment in Australia permits managerial discretion when determining the contribution expense to the DBF. The development
the USA & UK                                                                        of reporting for commitments in defined benefit funds by the sponsor in Australia is compared to the USA and the UK. This
                                                                                    lack of regulation of the defined benefit fund expense in Australia permits the modelling of the contribution expense to
                                                                                    determine if management exploit this flexibility of accounting treatment. An assessment of the interrelationship between the
                                                                                    actuarial valuation and the role of the sponsor for Australian DBFs can also be gleaned.
Pensions and Capital     John Ralfe       IN, PF       openingremarks_3             This paper considers the pension plan as part of the capital structure of the sponsoring employer. This enables lessons from
Structure                Cliff Speed                                                financial theory concerning capital structure to be used to answer the question "wha t assets should a pension fund hold? ”.
Why hold Equities in the                                                            The standard Modigliani-Miller framework is expanded on to consider the implications of corporate tax. This leads to the
Pension Fund?                                                                       conclusion that bond investment for pension plans has tangible advantages over holding risky assets (e.g. equities). The paper
                                                                                    considers a case study of the pension plan of The Boots Company, a UK pharmacy retailer with a pension fund of around
                                                                                    £2.3bn ($3.5bn), where these ideas were put into practice. Finally the paper discusses the value released to shareholders and
                                                                                    the extra security members of the pension fund have derived from putting theory into practice.
The Influence of the    Semyen Spivak                  openingremarks_4             Enron case brings up the issue that has long worried pension and benefits experts: a retirement plan hugely dependent on the
Financial Status of the Ravil Akhtyamov                                             health of the company that provides it. Enron’s own stock accounted for more than 60 percent of the assets in the $2,1 billion
Pension Plan Sponsor to                                                             defined contribution 401 (k) plan in 2001. It is widely known that some companies have even higher levels, creating even
the Solvency of the                                                                 worse scenario should these companies fail. Occupational pension funds investing pension reserves in securities of their own
Pension Fund                                                                        companies are now the most common in other countries, including Russia. Pension plans used to invest the bulk of equity
                                                                                    assets in the own company’s stock, representing a worrying concentration of risk for beneficiaries.
                                                                                    Our purpose is to establish the right balance between interests of the company and requirements of risk management. Hence,
                                                                                    we need to create the default probabilities model in conditions of rising uncertainty and volatility in the world financial
Letting Financial      Mark Ruloff        AC, MF       solvencymeasures_1
Economics Drive the
Development of
Transparent Accounting                                                              link accounting &
and Contributions                                                                   contributions
The Great Controversy Symposium - June, 2003 - Vancouver                                                                                         abstract
        Title                  Author      Subject(s)      filename (all are .pdf)

Desirable Funding Level Carole Turcotte    MF           solvencymeasures_2
of Defined Benefit      Anne Fortin
Pension Plans
Pension Funds: A      Roland van Gaalen    MF           solvencymeasures_3
Funding Adequacy Rule                                                                Suppose that after a downturn in the financial markets, pension funds have funding ratios in the neighborhood of 100%, all
with a Flexible                                                                      cushion reserves having been more or less exhausted. ... if financial market conditions improve, what level should the funding
Mismatch Reserve                                                                     ratios reach before any assets can be released, at least from a solvency perspective? ... [any such level] is neither a constant of
                                                                                     nature nor an immutable truth of reason, but follows from a particular method. Moreover, it depends equally critically on the
                                                                                     terms of the average pension plan and the fund’s asset allocation as well as a number of assumptions and other choices.
                                                                                     In this article, it is argued that it would be reasonable to permit the minimum solvency cushion that is required on top of the
                                                                                     100% funding ratio to vary as driven by market conditions between a floor of zero and an upper boundary. ... Moreover, a
                                                                                     method is suggested for determining the upper boundary by means of a rule, that is, a fixed formula. To complete the circle,
                                                                                     the solvency protection system could be incorporated in the pension promise.
The ABO the PBO and     Zvi Bodie          PF           investment_1                 The incentive to immunize the ABO is strongest when the plan is fully funded. If the plan is overfunded, it makes sense to
Pension Investment                                                                   invest in equities and pursue a kind of portfolio insurance strategy known as contingent immunization. If the plan is very
Strategy                                                                             underfunded and the sponsor is in financial distress, it may be optimal to exploit the put provided by PBGC insurance through
                                                                                     a high-risk investment strategy. Tax, regulatory, and other considerations have in the past created strong incentives to
                                                                                     overfund the pension plan. Recent changes in accounting rules and tax law are likely to reinforce the use of fixed income
                                                                                     immunization strategies and reduce pension fund investment in equities.
Hedging Pension Plan    Jon Palin          IN, PF       investment_2                 This paper explores practical methods to hedge the fair value of pension scheme liabilities against changes in market
Funding Ratio           Cliff Speed                                                  conditions. The bond like nature of defined-benefit pension liabilities enables hedge portfolios to be constructed. We consider
                                                                                     how to find hedge portfolios for simple liabilities that are either fixed in monetary terms or linked to the consumer price index
                                                                                     and also more complex benefits containing options. After discussing the difficulties of hedging we propose a new algorithm
                                                                                     and apply it to practical problems.
Alternative Investments Laurens Swinkels   IN, PF       investment_3                 Market valuation of assets and liabilities plays a central role in new International accounting standards. This means that the
and the Solvency                                                                     dutch pension fund Industry, which has historcially been dominated by actuarial valuation Techniques, has to incorporate
Requirements for                                                                     valuation techniques from financial Economics. The proposed new financial assessment framework in the Netherlands sets
Defined Benefit Pension                                                              three requirements based on market valuation of assets and Liabilities: (a) minimum funding requirement, (b) solvency
Schemes                                                                              requirement, and (c) continuity requirement. We examine the use of alternative investments for Pension funds facing these
                                                                                     three requirements. Prudent investments in Commodities might provide liability hedging opportunities decreasing the
                                                                                     Probability of pension fund insolvency. We are skeptical about the use of Other alternative asset classes for improvement of
                                                                                     the speculative or Liability hedging part of the pension fund portfolio
Periodic Cost of        Larry Bader        AC           periodicVC                   cost of employee benefits to accounting periods. The periodic cost may be derived from the end-of-period liabilities that are
Employee Benefits       Jeremy Gold                                                  recognized; the likely liability candidates, using U.S. nomenclature, are the Vested Benefit Obligation (VBO), the
                                                                                     Accumulated Benefit Obligation ( ABO ) and the Projected Benefit Obligation ( PBO ).
                                                                                     Our analysis follows two parallel tracks. The first challenges us to justify certain benefit designs that may be identified by the
                                                                                     large accounting conflicts they engender. The second asks us to recognize that these same accounting conflicts may lead to
                                                                                     public misunderstandings and societal reaction.
The Great Controversy Symposium - June, 2003 - Vancouver                                                                                        abstract
         Title                  Author     Subject(s)      filename (all are .pdf)

F.E. and Actuarial        Tony Day         MF           valuation_employerchoices_2   This paper examines concepts from both financial economics and actuarial science as applied to defined benefit schemes
Practices                                                                             using a simple discounted cash flow framework as a reference point. The general finding is that many standard modes of
                                                                                      actuarial thought are, in fact, indefensible when examined with the tools and techniques of financial economics. The call for
                                                                                      revision of actuarial training and practices is credible and necessary.
                                                                                      However, the paper also touches upon areas where a heavy-handed application of finance theory could be misguided due to
                                                                                      limitations in the simple financial economic models presented. It concludes that financial economics should be carefully
                                                                                      integrated into actuarial thought rather than appended to existing actuarial theory or inserted as a wholesale replacement.
Pension Funding without Robert McCrory     MF           valuation_employerchoices_3   My goals for this paper are quite modest:
                                                                                      vital aspects of defined benefit pension plans that are often omitted from our actuarial models: Future new entrants and
                                                                                      stochastic variability of asset returns and inflation.

                                                                                      calculations do not arise naturally and are not needed.

                                                                                      experimentation – rather than analytically with simplified mathematical models. The mathematical models we typically use are
                                                                                      too abstract and leave out too much.
Discount Rate Revisited Dimitry Mindlin    AC           valuation_employerchoices_4   In this paper we will:
                                                                                      1. define major types of pension commitments and valuations;
                                                                                      2. analyze basic actuarial assumptions;
                                                                                      3. discuss measurements of pension commitments;
                                                                                      4. introduce a new type of liabilities;
                                                                                      5. clarify the source of “the great controversy”.
A Lifecycle Analysis of   David McCarthy   DE           benefitadequacy_1             This paper employs a lifecycle model from the consumption-savings literature to examine the tradeoffs between defined
DB                                                                                    benefit and defined contribution pension plans. We examine the effects of varying risk aversion, varying initial income and
                                                                                      financial wealth, and varying wage processes (that may be correlated with returns on the risky asset).
                                                                                      The model illustrates two economic functions performed by defined benefit plans. Firstly, DB plans pool individual wage
                                                                                      risks. This allows older workers to buy a wagelinked security that increases their exposure to wage risks. Secondly, they create
                                                                                      a group annuities market that reduces the cost of adverse selection.
Financial Economics and Brian Rosenblum    DE           benefitadequacy_2             While examining the expected replacement ratio does illustrate some of the implications of a plan design on participants, this
the Retirement Plan                                                                   process is incomplete in its treatment of risk. In fact, it makes the assumption that the participant does not place any value,
Design Model                                                                          positive or negative, on risk. Unfortunately, this premise violates a basic principle of financial economics, that a risk-averse
                                                                                      investor assigns a lower value to a financial arrangement where risk is present compared to one that is absent of risk.
                                                                                      [The] analysis suggests a method of incorporating utility theory into the evaluation of plan designs, thus keeping the model
                                                                                      more in accord with the basic principles of financial economics. The market value of risk, utility theory, and decreasing risk
                                                                                      tolerance with age are all concepts which are virtually ignored in traditional plan design models, yet are quantified and shown
                                                                                      to be quite significant in financial economic models. By using a model that captures these elements, the actuary can better
                                                                                      measure the adequacy as well as the relative value of different retirement plan designs.
The Great Controversy Symposium - June, 2003 - Vancouver                                                                                       abstract
        Title                 Author      Subject(s)      filename (all are .pdf)

A Bayesian Model for    Armand Yambao     DE           benefitadequacy_3            During the prosperous economic times of the 90’s, employees preferred defined contribution plans where high investment
Developing an Optimal                                                               returns were directly added to their accounts. On the other hand, many employers who sponsored defined benefit plans
Mix of DC and DB                                                                    enjoyed contribution holidays and pension income from the accounting of their pension plans. However, during the tough
                                                                                    economy in recent years, employers were surprised by large required cash contributions for their defined benefit plans. Also,
                                                                                    employees suddenly realized that the benefit from their defined contribution accounts might not be sufficient for their
                                                                                    retirement. …
                                                                                    A common objective for an employer is to have predictability in cash contributions for the retirement plans. From the
                                                                                    employee’s perspective, an objective is to have a sufficient retirement benefit. … A Bayesian Model is used to develop an
                                                                                    optimal mix of defined benefit and defined contribution plans that achieves both of these objectives.
Pension Funds and the   Jon Exley         PF           valuation_1                  The paper considers the impact of UK defined benefit pension scheme funding and investment on the UK economy. It
UK Economy                                                                          suggests that many conventional theories are based on incomplete or inconsistent economics….
                                                                                    The conclusion of the paper is that the most significant impact of pension funds on the UK economy relates to the costs
                                                                                    imposed by extreme mismatching between their financial assets and liabilities. We argue that such risks can, in essence,
                                                                                    “crowd-out” entrepreneurial risk by increasing the cost of capital. We assert that the UK economy would gain from greater
                                                                                    focus on the matching of the substantial assets and liabilities associated with pension funds
F.E. and Pensions       Timothy Gordon    PF           valuation_2                  There has been strong resistance within the UK Actuarial Profession against taking on board the lessons of financial
Actuaries - The UK      Stuart Jarvis                                               economics. Nevertheless, the majority of the largest UK actuarial firms have significantly modified their standard approaches
Experience                                                                          to actuarial valuations to take account of criticisms based on financial economics. In the meantime, the failure to come to
                                                                                    terms with basic lessons from financial economics has caused the UK Actuarial Profession to lose credibility with key players
                                                                                    in the UK. The UK Actuarial Profession has still not come to a single view on financial economics and the major divisions
                                                                                    that remain continue to hamstring its policy development.
Sources and            Eric Klieber       RK           valuation_3                  price. This price would take into account the future utility of the item and changes in price with time and use, which would all
Measurement of Risk in                                                              be known with certainty. Risk complicates matters immensely by making future utility and price changes unknown. Capitalist
DB                                                                                  economies use the market to set prices, based on the tacit consensus of market participants regarding what the future holds and
                                                                                    how that future will affect an item's current value. Individuals are free to place their own value on any item in the marketplace
                                                                                    and to make buy/sell decisions based on any difference between the value they set and the market value. Skill in setting value
                                                                                    determines an individual's success in the market.
A Forward-Looking       Douglas Andrews   MF           valuation_assumptions_1      The paper shows an approach whereby future asset returns and liabilities are modelled taking into account the probability of
Asset - Smoothing                                                                   various returns. The paper develop s an asset smoothing approach that uses an expected return on the asset mix, and averages
Method                                                                              both historical and projected asset values.
                                                                                    Key Items To Be Covered
The Great Controversy Symposium - June, 2003 - Vancouver                                                                                           abstract
         Title                    Author     Subject(s)      filename (all are .pdf)

Fixing the Pension Plan   Edward Burrows     MF           valuation_assumptions_2       … the original ERISA funding rules mimicked, very closely, the funding techniques that responsible employers had followed
Funding Rules                                                                          voluntarily in the years before ERISA. So, the brave new world of ERISA was born, and we all sat back to see how the new
                                                                                       funding rules would work.
                                                                                       It turns out that sometimes they worked – and sometimes they didn’t. When they didn’t work, the reasons for failure quickly
                                                                                       became so obvious that many planners were chagrined they hadn’t anticipated the failures. The original rules were designed to
                                                                                       reach target funding levels gradually and relatively painlessly over a long period. So far, so good. So long as the sponsor
                                                                                       remained healthy over this period of gradual buildup, employees would be fully protected – without any help from the Pension
                                                                                       Benefit Guaranty Corporation (the PBGC).
Measuring Terminable      Jeffrey Petertil   FE, AC       valuation_assumptions_3      The actuarial model used to measure retiree health benefits has proven to be of limited usefulness in understanding the
Post-Retirement                                                                        obligations associated with the benefits. A major failing has been to disregard the financial uncertainty that is implicit in a
Obligations                                                                            plan sponsor’s unilateral ability to change, or even terminate, the obligation to pay for the benefits. …
                                                                                       This paper examines a number of ways the actuarial model can be refined to take into account the plan sponsor’s legal right to
                                                                                       terminate the plan. After discussing the current model and its drawbacks, this paper will introduce three of those refinements
                                                                                       and briefly discuss how each would fit with the usual actuarial model. One modification leans more heavily on financial
                                                                                       economics than the others, but in the sense that each attempts to quantify a risk previously not quantified, each may be of
                                                                                       interest to this forum. The paper will then turn to how the measurement results of these refined models would compare with
                                                                                       those of the current model, the likely effect on behavior of interested parties if the refined model were to be adopted, and likely
                                                                                       objections to adopting the refinements. Finally, the paper will comment on some aspects of The Great Pension Controversy.
A Reevaluation of ASOP Frank Todisco         AS           valuation_assumptions_4
27, post Enron                                                                         This paper calls for a reconsideration of ASOP 27 in the wake of the scandals that began with Enron and have rocked the
                                                                                       world of finance. Financial professionals have been under scrutiny, and actuaries have not been spared. The profession is
                                                                                       being questioned not just about its financial models, but also about its ethics. … The paper critiques two aspects of ASOP 27:
                                                                                       the actuary’s obligation with respect to employer-selected FAS 87 assumptions, and the concept of the “best-estimate range.”
                                                                                        ASOP 2 had required the actuary to disclose any disagreement with employer-selected assumptions. … [and the paper] argues
                                                                                       for a return to the ASOP 2 standard. ASOP 27 also introduced the “best-estimate range.” Continued reliance on this
                                                                                       construction could prove dangerous to the profession: it is a contradiction in terms, it is arbitrarily wide, and it permits the
                                                                                       selection of aggressive assumptions. The paper argues for a tighter standard, perhaps based on the different approach taken in
                                                                                       ASOP 35.
Did Pension Plan          Julia Coronado     AC, IN       debate_2                     During the 1990s the assets of corporate defined-benefit (DB) pension plans ballooned as a result of the booming stock
Accounting Contribute     Steven Sharpe                                                market. Because of accounting rules for DB plans put in place in 1986, this robust growth provided a substantial, although
to a Stock Market                                                                      stealthy, boost to the profits reported by sponsoring corporations. In particular, the extraordinary returns earned on pension
Bubble                                                                                 assets flowed to the bottom line on corporate income statements through lower net pension cost accruals included in general
                                                                                       corporate expenses.
                                                                                       These developments may have misled many investors about the value of corporate equities, because pension cost accruals
                                                                                       provide a fairly convoluted signal of the underlying value of net pension assets, in two ways.

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