Figure 2.3.1. Risk-Return Trade-off and
Expected Times to Exit Underfunding
High-equity strategies can return a pension fund
to solvency, but a high-bond strategy cannot.
120
1. Funding Ratio
(Percent)
110
100
High equity
Balanced
High bonds
90
80
70
60
1
2
3
4
5 6
Years
7
8
9 10
High-equity strategies entail very high levels of
risk, which can result in insolvency.
40
2. Value at Risk at 95 Percent Confidence Level
(Percent of initial funding ratio)
VaR 5%
35
30
25
High equity
20
Balanced
15
10
5
High bonds
0
0
2
4
6
8
Risk (percent)
10
12
Sources: Bloomberg L.P.; Thomson Reuters Datastream;
and IMF staff calculations.