Asset Allocation and Capital Market Issues in Developing Economies
These liabilities need to be matched by the scheme’s assets, which should be structured in a way that reflects the age profile of members. This process – generally referred to as Strategic Asset Allocation (SAA) – forms the basis for pension schemes’ portfolio construction and investment strategy. Its goal is to deliver pension promises to its members, either those that are explicit in Defined Benefit (DB) schemes such as final salary-based entitlements or those implicit in Defined Contribution (DC) pensions, where members expect their scheme to provide a meaningful retirement income.
Around the SAA, investment managers may take active risk positions based on their analysis of expected macroeconomic conditions. They may also over- or underweight specific investment types relative to the SAA based on their outlook using a Tactical Asset Allocation (TAA) overlay. In the long term, pension fund asset values must be protected against inflation which erodes the real value of both investment capital and retirement income.