by David Blake
ISBN 13 978 0-470-05843
484 pages hardback
John Wiley & Sons
dequate understanding of many key challenges and opportunities related to retirement security needs an understanding of pension finance. This book offers an up-to-date introduction to a wide range of topics in this area. The book covers DB as well as DC plans and corporate pension finance as well as pension fund management, performance measurement, risk management and pension insurance. Moreover a lot of terminology is defined and explained and information on institutions in the UK is provided.
The book targets a broad audience, ranging from investment consultants to pension regulators and from pension policy makers to pension accountants. Many chapters originate in academic teaching and remain very well suited for that purpose.
The heterogeneity in the target group implies that the discussion of a number of topics that are also covered in standard finance courses will be obvious to some, but only a very condensed introduction for others. This applies for example to the discussion of risk management and derivative pricing. Fortunately many textbooks are available that discuss these topics at any required level of depth. What makes this book unique is the discussion of many pension specific subjects that are not covered in other books.
The chapter in the book on DB pension funds, for example, explains the conflict of interest between the sponsor and the scheme members. The sponsor has written a put option to protect the entitlements of the members but also received a call option to benefit from premium holidays and restitutions if the investment returns exceed the expectations. The valuation of these options is discussed as well as the implications for preferred asset allocations. Likewise the discussions on corporate pension finance, pension fund management and longevity risk and the chapter on pension fund insurance are particularly informative and not available elsewhere.
The latter compares the financial regulation of pension funds in the UK with that of life insurers and banks and compares the set-up of the Pension Protection Fund (PPF) with that of its US equivalent, the Pension Benefit Guarantee Corporation (PBGC).
The rapidly developing literature on behavioural finance is not reviewed in this book. This literature contains many relevant findings related to the question whether individuals can cope of with all the decisions imposed on them in pension plans. This topic is considered at length though in a companion book, entitled “Pension Economics”.
The book is brand new and likely to develop further in future editions. A next edition might discuss annuity markets and the annuity puzzle in more depth and could highlight the impact of reductions in human capital on the optimal exposure to stock markets over the life cycle. Perhaps even additional international comparisons of pension institutions can be included. This could relate, for example, pension insurance through the PPF and the statement of funding principles as required in the UK to the new Swiss and Dutch solvency rules for pension funds and to the upcoming Solvency II legislation. This would also open the opportunity to put more emphasis on hybrid schemes that have developed as alternatives to the pure DB and DC plans that are discussed in the book.
Notwithstanding these suggestions for subsequent editions, the book clearly fills an important gap and is to be highly recommended for everyone with a professional or academic interest in pension finance.
Theo Nijman is the F van Lanschot professor of investment analysis at Tilburg University, the Netherlands and scientific director of Netspar - a public-private research network on pensions, ageing and retirement