Measuring investment risk in defined benefit pension funds

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An earlier version of this paper, treating in detail investment risk as it applied to Irish pension funds, was prepared to accompany and support the report of the working party of the Society of Actuaries in Ireland, <i>Report on investment risk</i>, presented on 24 February 2004. This paper concludes that the most closely matching asset for pension fund liabilities is composed mainly of conventional and index-linked bonds. It also makes clear that there is generally no simple matching asset for pension fund liabilities and some judgement must be used in identifying the closest matching portfolio. We note, in particular, that the above argument leads to a portfolio that, if history is any guide, has a lower expected long-term return than a predominantly equity portfolio.