DOES THE MECHANICS OF MACRO-ECONOMIC VARIABLES EXPLAIN THE PERFORMANCE OF PENSION FUNDS IN THE FUND INDUSTRY? A QUESTION ON PENSION FUNDS RISK MANAGEMENT
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Received : February 5, 2020; Revised August 26, 2020
Communicated by : Professor Shuzhen Yang
A number of economic miracles are being birthed out from the joint meeting of economic business cycles and the physics of macro-economic variables. Some of the impacts of these miracles have been looked at with no serious attention paid to other important functional units like funds industries. However, the macro-economic variables do stimulate some risks that greatly affect the pension returns and performance. This study looked at the impacts of selected macro-economic variables on pension funds. We aim to see how these factor variables affect the performance of pension funds. We actually posed a question on whether there are cause and effect relations between pension returns and these variables as a way to manage well the associated risks and to ensure healthy performance of the fund. We conjectured that the movements associated with the macro-variables have some risks that cause shifts to the pension returns. Such shifts and movements are surely important in planning and risk management. We used a newly formulated linear model to answer our question. We analysed the impacts of each selected variable using the data collected from 2000-2018. We coined our model with powerful statistical test to strongly evaluate the effect of each variable on the performance of pension funds. Among these, we used the Hotelling t test, correlation test and the Akaike’s Information Criterion (AIC). Results were computed and noted down. From the variable analysis done, inflation rates greatly affect the performance pension fund assets in a negative way. Other variables presented weak effects on the pension fund performance as indicated by positive correlation coefficients, AIC values and the obtained t test values. We then concluded that, all macro-economic variables present unhealthy conditions on the performance of pension funds and therefore special attention should be given to these. Consequently, fund managers should make all necessary adjustments to keep up on track and to ensure smiling returns from the pension funds. This helps much on reserve calculations by actuaries and fund valuators. This is also our contribution. We finally recommended progress checks of the pension funds asset performance against the prevailing rates of the macro-variables.
pension funds, macro-economic variables, pension assets, AIC, asset returns