Joachim Coche

Central bank reserves and sovereign wealth management

List of Illustrations Preface Introduction About the Editors Notes on Contributors Dinner Speech: Asset Allocation in a General Equilibrium Framework B.Litterman PART I: CENTRAL BANK RESERVES MANAGEMENT Global Reserves Management K.Rybinski & U.Krynska Conceptual Issues in Central Bank Strategic Asset Allocation A.Joia & J.Coche Strategic Asset Allocation: Balancing Short-Term Liquidity Needs and Real Capital Preservation J.Bonza, N.Gomez & R.Pabon Asset Liability Management for Central Banks U.Kisoen Combating Intervention Risks S.Fisher Reserves Adequacy and Diversification V.Sahakyan & J.Coche PART II: SOVEREIGN WEALTH MANAGEMENT Asset Allocation and Portfolio Construction for Sovereign Wealth Managers F.Weinberger, B.Lee & D.Rogal A Note on Portfolio Choice for Sovereign Wealth Funds B.Scherer Portfolio Choice for Oil Based Sovereign Wealth Funds B.Scherer Strategic Investment and Risk Management for Sovereign Wealth Funds S.Claessens & J.Kreuser Optimal Scale and Asset Allocation for SWF: Chinas Case Y.Zhang, X.Wei& Y.Hou The Impact of Sovereign Wealth Funds on Global Financial Markets M.Fidora & R.Beck Public Investment Funds and Value-Based Generational Accounting R.Molenaar, R.Hoevenaars & E.Ponds Notes Bibliography Appendix Index

Chapter Chapter Understanding and Allocating Investment Risks in a Hybrid Pension Plan

This paper analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans which are optimal either from the perspective of the plan sponsor or the beneficiaries.The focus is in particular on how the introduction of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on the return of the members’ individual investment accounts affect investment decisions and plan costs. Within a comparative static analysis framework, it is shown that for low to medium risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees while for the latter costs increase exponentially with investment risk. The study also finds that portfolio choices of the sponsor and the beneficiaries show substantial differences depending on the exact plan design and the beneficiaries’ risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries, and to keep pension plan costs under control. Disciplines Economics Comments The published version of this Working Paper may be found in the 2006 publication: Restructuring Retirement Risks. This working paper is available at ScholarlyCommons: https://repository.upenn.edu/prc_papers/384 Restructuring Retirement Risks