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Correlation and the Pension Protection Fund *
Author(s) -
Sweeting Paul
Publication year - 2006
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/j.1475-5890.2006.00031.x
Subject(s) - pension , economics , volatility (finance) , pension fund , actuarial science , econometrics , stochastic volatility , annuity , financial economics , finance , life annuity
In this paper, I use a stochastic approach to model the effect that correlations between pension scheme assets and firm values should have on the premiums chargeable by the Pension Protection Fund. In particular, I look at the effect on the aggregate premium that should be charged considering a representative universe of companies and their pension schemes. I find that ignoring the correlations, even if the volatility of pension scheme assets is allowed for, leads to potentially serious underestimation of the aggregate premium due.