Investment risk in Pension Funds: a dynamical approach

The aim of our contribution is to develop a technique for rebalancing pension fund portfolios in function of their pointwise level of risk. It has been debated that post retirement benefit plans should have limitations on their asset allocation, based on the risk profile of the different financial instruments available on the financial market. The performance of pension funds is usually measured in terms of returns rather than risk. Risks are taken into account especially during market crises, when losses in the portfolio of financial instruments of the fund could lead to depreciations in the accrued contributions. Some analysises (see Ryan and Fabozzi 2003) show that post 2001 bankruptcies of US pension funds had their roots in the actuarial evaluation techniques rather than in asset losses, if we consider long-term stock return. According to Bader (2003) and McClurken (2006), post retirement benefit plans, pertaining to the ‘first pillar ’ of a pension system, should not invest in high-risk financial instruments because this would lead to problems related to moral hazard and to the evaluation of ‘superfluous risk’. Trudda (2005) proposes an application to the pension funds of Italia