IC313-Finance and Occupational Pensions

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Level:6
Terms in which taught: Spring term module
Pre-requisites:
Non-modular pre-requisites:
Co-requisites:
Modules excluded:
Current from: 2019/0

Module Convenor: Prof Charles Sutcliffe

Email: c.sutcliffe@icmacentre.ac.uk

Type of module:

Summary module description:

This is an applied course with little quantitative content. It deals with one of the most important groups of institutional investors - pension schemes, focussing on occupational pension schemes. Pensions are in a state of crisis and change, and have become the subject of popular debate and controversy. They employ fund managers to invest many £trillions on their behalf. Developing countries, such as China and India, have the potential for an enormous expansion of their pension schemes. Therefore the assets under management of pension schemes globally are likely to increase considerably. The investment of pension funds requires an understanding of how pension schemes work, which is hard to acquire as it has not been taught by educational establishments. This module will provide a detailed knowledge of a major group of institutional investors (pension schemes) and the real world problems they face.

Aims:

This is an applied course with little quantitative content. It deals with the most important group of institutional investors - pension schemes, focusing on occupational pension schemes. Pensions are in a state of crisis and change, and have become the subject of popular debate and controversy. They have two major implications for finance - investing the pension fund money, and the effects of a pension scheme on the corporate sponsor (i.e. employer). The investment and corporate finance implications of pension funds require an understanding of how pension schemes work, which is hard to acquire as it has not been taught by educational establishments.

Pension schemes employ fund managers to invest many £trillions on their behalf. Developing countries, such as China and India, have the potential for an enormous expansion of their pension schemes. Therefore the assets under management of pension schemes globally are likely to increase considerably.

Pension schemes also play an important role in corporate finance affecting company mergers and acquisitions, leverage, liquidity, the cost of capital, company share prices and corporate capital structure.

This module will provide a detailed knowledge of the largest group of institutional investors (pension schemes) and the real world problems they face.

Assessable learning outcomes:

By the end of the module, it is expected that students will be able to:-

• Explain the basics of how the main types of occupational pension scheme operate.


• Demonstrate an understanding of the main challenges facing pension schemes, and some approaches to meeting these challenges.


•  Explain the investment decisions defined benefit pension schemes must make when managing the pension fund.


• Understand the financial implications of the relationship between a pension scheme and its corporate sponsor.


• Comprehend how annuities work, and their role in providing pensions.

Additional outcomes:

Outline content:

A. Introduction to Pension Schemes

The Three Pillars, Replacement Rate, Funded versus Unfunded Schemes, Macroeconomic and Inter-Generational Considerations, Pension Scheme Membership, Main Types of Occupational Scheme, Tax Benefits of Pensions, Life Expectancy, National Employment Savings Trust (NEST)

B. Selected Pension Scheme Topics

Why Do Employers Provide Pension Schemes?, The Death of DB Schemes,  The Shift from DB to DC Schemes, Problems with DC Schemes,  Pensions Buy-Outs and Buy-Ins, Dealing With Longevity, Pension Scheme Insurance, The Design of Pension Schemes, Age and a Uniform Contribution Rate, Redistribution by Pension Schemes.

C. Investment by Pension Funds

DC Schemes, DB Schemes, Example of USS, Unusual Features of the Investment Problem, Decisions that Must be Made by Pension Schemes, Asset Allocation and the Cult of the Equity, Asset-Liability Models (ALM), Restrictions on Investment, Investment Performance of Pension Funds, Effects of Pension Schemes on Capital Markets, Sovereign Pension Funds

D. Corporate Finance and Pension Schemes

Consolidation with the Company, Leverage Effects, Liquidity Effects, Asset Betas, the Cost of Capital and Pension Schemes, Effects of Pension Schemes on Mergers and Acquisitions, Merging DB Schemes, Freezing DB Schemes, Asset Allocation of the Pension Fund, Funding Ratio and Bond Spreads and Credit Ratings, Pension Deficits and the Shares Price, Sponsor Risk, Irrelevance of Scheme Funding and Asset Allocation, Leverage Effects, Equity Investment and Risk Sharing, Reasons for the Over and Under-funding of DB Schemes, Taxation Arbitrage and DB Pension Schemes, Reasons for Over and Under-funding Pension Schemes, Tax Arbitrage, Default Insurance and Risk Sharing.

E. Annuities

A Simple Annuity, Voluntary and Compulsory Annuities, The Increasing Importance of Annuities, A Simple Annuity Pricing Model, Other Influences on Annuity Prices, Mortality Discount or Credit, Tontines, Reasons for Buying an Annuity, The Annuity Puzzle, Some Partial Explanations for the Annuity Puzzle, Evaluating Annuity Prices, Some Other Types of Annuity,  Annuity Timing Decision, The Annuity Decision and the OMO, Historical Perspective on Mortality Tables, Long Term Care and Adverse Selection, Did Joint Life Annuities and the Broken Heart Syndrome Indirectly Cause the Credit Crunch?, Guaranteed Annuity Rates (GAR), Deferred Annuities, A Long Term Solution? - Single Premium Deferred Annuities (SPDA)

Brief description of teaching and learning methods:

Full-Time: Core lectures supported by classroom-based tutor-led discussion. 

Contact hours:

	Autumn	Spring	Summer
Lectures		20
Tutorials		7
Guided independent study:		173
Total hours by term		200
Total hours for module	200

Summative Assessment Methods:

Method	Percentage
Written exam	80
Class test administered by School	20

Summative assessment- Examinations:

Summative assessment- Coursework and in-class tests:

The written exam will be a two-hour closed book examination

The class test will be a multiple choice test. 

Formative assessment methods:

Penalties for late submission:
The Module Convener will apply the following penalties for work submitted late:

where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day[1] (or part thereof) following the deadline up to a total of five working days;

where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

The University policy statement on penalties for late submission can be found at: http://www.reading.ac.uk/web/FILES/qualitysupport/penaltiesforlatesubmission.pdf
You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Assessment requirements for a pass:

A minimum mark of 40%.

Reassessment arrangements:

Re-examination in August / September of the same year.

Additional Costs (specified where applicable):

Last updated: 16 April 2019