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

David Miles and James Sefton

No 19254, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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

Keywords: Pensions (search for similar items in EconPapers)
JEL-codes: G11 G22 G50 (search for similar items in EconPapers)
Date: 2024-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19254 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19254

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19254
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).