Estimating the Minimum Required Capital for the Financial Sustainability of Pension Funds: A Case Study

Authors
Abbas khandan 1
Ali Makhdoumi 2
leili niakan 3
1 Faculty of Economics, Kharazmi University
2 Shahid Beheshti University
3 Insurance Research Center (IRC)
Abstract
Objective: Despite their important role in Iran's welfare and economic system, pension funds have faced financial instability and serious threats in recent years due to financial challenges, especially the cash balance deficit. The aim of this study is to answer the hypothetical question of how much capital and assets is required at minimum to cover the deficit and liabilities of these pension funds.

Methodology: In this research which is a case study for one of the Iranian pension funds, by using two methods of futurology and the Value at Risk (VaR) models, an attempt has been made to estimate the minimum required capital for the financial sustainability of pilot pension fund.

Findings: The results show that in the scenario writing method, the minimum capital required to cover the deficit of this pilot pension fund in four scenarios based on the bond rate, ideal, optimistic and realistic, is on average more than 517 trillion tomans of assets for the year 1402. In the Value at Risk (VaR) method with different parametric (ARIMA-GARCH models) and non-parametric (Monte Carlo and bootstrap simulation) approaches, it was determined that this pilot pension fund needs on average more than 550 trillion tomans of assets for the year 1402 in order to cover its deficit with investment income. The results of this article considering the size of pension funds can be easily generalized to other funds and, thus, can be useful in adopting reform policies for financial sustainability in general.
Keywords
Minimum required Capital
Pension Funds
scenario writing
value-at-risk
financial sustainability
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