The Death Of The Risk Premium : Consequences Of The 1990’s
- Topics:
- Commercial Lending
- Tags:
- Asset,
- Asset Management,
- Business Operations,
- Finance,
- First Quadrant,
- Investment,
- Operational Planning,
- Premium
- Source:
- First Quadrant
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Overview: One of the most striking developments of the 1990's is the evaporation of the forward-looking risk premium for stocks, measured relative to bonds. This development is new enough that it is not yet widely accepted as fact. Whether fact or mere hypothesis, it is useful to consider the implications of a negative risk premium for stocks. The implications are far-reaching and sobering, affecting funding policy, investment return expectations, and asset allocation planning, not to mention lesser aspects of institutional asset management. It states that in 1990 Many Pension Plans believe they have built a reservoir of actuarial pension surplus such that the Plan does not have to contribute for a very long time. On closer examination, these Plans tend to have a real return assumption for assets that resembles, or is explicitly based upon, the past. The objective of a Pension Fund is (1) to pay or fund the pension liability, (2) at the lowest cost to the Plan Sponsor, (3) subject to sensible risk. This means that, ideally, returns on the pension assets should be the primary source to fund these liabilities, rather than a pension contribution coming from the employer, the employees or, in the case of Public Funds, current or future taxpayers. For university endowments, the same logic applies, typically over an even longer span than most pension portfolios.
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Format: PDF | Size: 198KB | Date: Jan 2003 | Pages: 13
