Abstract:
Reforms have begun in Pakistan to sustain the funded pension
scheme for government-operated pension schemes such as the Employees
Old Age Benefit Institution (EOBI). Presently, the EOBI operates its own
fund and invests most of its assets in government-backed securities which
are basically interest-bearing debt instruments. Although the returns on the
EOBI’s fund have been high for a short period due to higher interest rates
and minimum pension distributions, this trend is not likely to continue.
Funded pension schemes depend heavily on portfolio performance because
risk is transferred to contributors. Therefore, asset allocation becomes
considerably important. The purpose of this study is to determine optimal
asset allocation and the role of international diversification specifically for
the EOBI’s funds and generally for newly created funded pension schemes
in Pakistan. The article analyzes the potential benefits accrued through
international investments based on historical returns over almost five
decades with varying degrees of risk aversion coefficients. Varying degrees
of risk may allow policymakers to incorporate their strategies for future
asset behavior and take timely action to counter the potential threat of
aging, demographic shifts, and liabilities and to ensure decent benefits for
pensioners.
