ABSTRACT
The concept of investment risk is generalized, which allows the quanti cation of the investment risk associated with any given investment strategy to provide for a pension. Case studies, using historic market data over the long term, estimate the investment risk associated with di erent investment strategies. It is shown that a few decades ago, when
bond markets only extended in depth to 20 year maturities, the investment risk of investing in equities was of the same order of magnitude as the investment risk introduced by the duration mismatch from investing in bonds for immature schemes. It is shown that now, with the extension of the term of bond markets and the introduction of strippable bonds, the least-risk portfolio for the same pension liability is a bond portfolio of suitable duration. It is argued that the investment risk voluntary undertaken in de ned bene t pension plans has grown markedly in recent decades at a time when the ability to bear the investment risk has diminished. Investment risk in pension funds is quite di erent to investment risk of other investors, which leads to the possibility that current portfolios are not optimized-that is, there exist portfolios that increase the expected surplus without increasing risk. e formalizing of our intuitive concept of investment risk in pension saving is a rst step in the identi cation of more e cient portfolios.
