Asset allocation for pension provision

Financial provision for old age is a serious issue. This paper therefore begins by outlining the pension situation in Germany, arriving at the conclusion that, as matters stand at present, none of the three "pillars" of pension provision - state and occupational pensions and private pension schemes - can sufficiently guarantee adequate retirement income in the future. Given increasing population ageing in Germany for one, provision must focus particularly on fully funded private provisioning and also partly on occupational pension plans. Because of the need for fully-funded systems, asset allocation for pension provision taking account of the key characteristic of retirement saving - the long investment horizon - is particularly important. Thus it is being analysed what effect a varying horizon has on the riskreturn properties of the asset class stocks. The analysis leads to the conclusion that the risk entailed in stock investment is reduced relative to the yield as the investment horizon lengthens. This horizon effect can be put to use for asset allocation, as illustrated with reference to a model based on the shortfall probability (zeroth order lower partial moment, LMP0). A look is also taken at alternative horizon-dependent asset allocation models. The paper concludes with an examination of the practical applicability of the LPM0 for pension provision.