4.3. Financials

The business of Pension Fund is a long term business that last several decades, as every individual plan member has interests in the fund from his beginning working life up to retirement. The only possibility to cope with the corresponding uncertainty is statistics and the law of the high number⁷⁹. Applying this thought to Pension Funds liabilities and assets leads to the conclusion that statistics for retirement, death and age dictate to a large part the balance sheet of a Pension Plan⁸⁰.

In order to comply with its purpose (chapter 6.1), Pension Funds have to allocate their resources in a form that enables them to transform today’s value into future value (time value of money) and to diversify the risk of longevity. Governance and country/ industry development are sub priority targets, which may be considered in individual investment decisions⁸¹.

The combination of products (defined contribution or defined benefit) and funding scheme allows defining the pension fund’s strategic focus to meet the stakeholders’ expectations.

Table 14: deriving the strategic focus from funding and product scheme

In this respect the risk associated to pension funds is depending on the funding scheme and the product (DB or DC).

⁷⁹ From Wikipedia: In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed.

⁸⁰ Judging from the content of It is evident that these figures are of great importance to PF
⁸¹ If, for instance, in developing countries the financial support from pension funds significantly adds to growth of GDP and prosperity in the long term (20 to 40 years), then this would also support the funds strategic targets
⁸² ALM: Asset-Liability-Management