Risk-aversion among pension schemes a recipe for poverty
It is a known fact that pension funds, in their quest to deliver returns that will maintain pre-retirement standard of living for retirees, are faced with trilemma in their asset allocation—namely profitability, liquidity and security.
Profitability is all about investing to achieve highest returns, liquidity rotates around the ability to answer to liabilities as at and when they fall due and security entails capital preservation.
In other words, it is a risk-reward balancing act. However, there is also a big concern that current asset allocation is too risk-averse and contributes to retirement poverty.
A 2012 survey by the Retirement Benefits Authority (RBA) revealed two unique characterisitcs of retirees nearly all (94 percent) of the surveyed mentioned they have dependants (with the average number per retiree calculated as two dependants).
All retirees surveyed earned monthly pensions that are below half of their pre-retiremement monthly salaries.
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