Funding and Asset Allocation Policy of a Partially Funded Defined Benefit Public Pension Plan: A Case of SSNIT.

Abstract

Employing the VAR (1) model to predict future asset returns and generating multiple scenarios of these returns using the Monte Carlo simulation technique with 10,000 iterations we analyze the normal contribution rate and associated total pension costs for different strategic asset allocations of the SSNIT scheme and in the process we constrain the shortfall risk by integrating a conditional value at risk limit. Using MatLab software we iterate to identify the optimal normal contribution rate that will fund the scheme at a minimum volatility of annual contribution rates coupled with a strategic asset allocation policy after we had identified the deterministic contribution rate that can fund the plan. Our results indicate that the SSNIT scheme can operate at a lower normal contribution rate than the current normal contribution rate but given the rate of growth of salaries a latent plan failure going forward was identified.