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Prudence Revisited The use of expected-utility theory for decision-making by the trustees of a retirement fund

2. Outline. IntroductionArgument of the utility functionFunctional form of the utility functionWeighted average relative risk aversionSummary and conclusion. 3. Introduction. Trustees' decisions:asset allocationpricing of accrued liabilitiespricing of accruing liabilitiesreinsurance of risks

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Prudence Revisited The use of expected-utility theory for decision-making by the trustees of a retirement fund

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    1. Prudence Revisited The use of expected-utility theory for decision-making by the trustees of a retirement fund Rob Thomson Actuarial Society of South Africa Retirement Matters seminar 6th June 2011

    2. 2 Outline Introduction Argument of the utility function Functional form of the utility function Weighted average relative risk aversion Summary and conclusion

    3. 3 Introduction Trustees decisions: asset allocation pricing of accrued liabilities pricing of accruing liabilities reinsurance of risks

    4. 4 Introduction Trusteeship: due care utmost good faith prudence beneficiaries vs. sponsors (DB/DC)

    5. 5 Introduction Normative validity of EU theory: for an individual: Raiffa (1961), Pratt (1964), Thomson (2003) for trustees: Arrow (1951), Harsanyi (1975), Sen (1973)

    6. 6 Outline Introduction Argument of the utility function Functional form of the utility function Weighted average relative risk aversion Summary and conclusion

    7. 7 Argument of the utility function Individual /DC member: current and future consumption (& bequests) (Von Neumann & Morgenstern, 1947; Savage, 1954) wealth at a time horizon (Tobin, 1958; Samuelson, 1969; Owen & Rabinovitch, 1983) wealth at retirement (Nielsen, unpublished); net replacement ratio at retirement (Thomson & Levitan, 2009) funding ratio relative to reasonable expectations

    8. 8 Argument of the utility function DB fund: one-period-ahead surplus (Cardinale et al, 2006) single-period surplus (Sherris, 1993) one-period-ahead funding ratio (Leibowitz et al, 1994: Hoevenaars et al, 2008)

    9. 9 Argument of the utility function Cobb?Douglas utility function:

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