Loading...
Asset-liability modelling and pension schemes: the application of robust optimization to USS
Platanakis, Emmanouil Sutcliffe, C.
Platanakis, Emmanouil
Sutcliffe, C.
Publication Date
2017
End of Embargo
Supervisor
Rights
© 2015 Taylor & Francis. This is an Author's Original Manuscript of an article published by Taylor & Francis in European Journal of Finance, 2015 available online at http://dx.doi.org/10.1080/1351847X.2015.1071714
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
08/07/2015
Institution
Department
Awarded
Embargo end date
Collections
Additional title
Abstract
This paper uses a novel numerical optimization technique – robust optimization – that is well suited to
solving the asset–liability management (ALM) problem for pension schemes. It requires the estimation
of fewer stochastic parameters, reduces estimation risk and adopts a prudent approach to asset allocation.
This study is the first to apply it to a real-world pension scheme, and the first ALM model of a pension
scheme to maximize the Sharpe ratio. We disaggregate pension liabilities into three components –
active members, deferred members and pensioners, and transform the optimal asset allocation into the
scheme’s projected contribution rate. The robust optimization model is extended to include liabilities and
used to derive optimal investment policies for the Universities Superannuation Scheme (USS), benchmarked
against the Sharpe and Tint, Bayes–Stein and Black–Litterman models as well as the actual USS
investment decisions. Over a 144-month out-of-sample period, robust optimization is superior to the four
benchmarks across 20 performance criteria and has a remarkably stable asset allocation – essentially
fix-mix. These conclusions are supported by six robustness checks.
Version
Accepted manuscript
Citation
Platanakis E and Sutcliffe C (2017) Asset–liability modelling
and pension schemes: the application of robust optimization to USS. The European Journal of
Finance. 23(4): 324-352.
Link to publisher’s version
Link to published version
Link to Version of Record
Type
Article