Admissibility restrictions

[Ayushi Arora]

Hi,
In Question 10.2, the question asks to explain the rationale and merits of the government introducing admissibility restrictions on pension funds.
Can someone explain what admissibility restriction mean ? and Also explanation of solution.
I am adding the solution here:
Admissibility restrictions operate by encouraging investment in certain assets without the restriction of a more prescriptive policy. Such an approach steers the trustees towards a certain strategy, whilst acknowledging that the strategy may not be suitable for all schemes. [1] Admissibility restrictions will be more acceptable to funds since they are less prescriptive than an outright restriction on holding. [1] The impact on a scheme depends upon the degree to which the scheme’s current investments are admissible and the solvency position of the fund. A well-funded scheme will be more relaxed about the admissibility restrictions, a less well-funded scheme will want to move quickly to hold admissible assets.

Thanks in advance.

 

[Joe Hook]

Admissible restrictions would restrict the assets that can be used to demonstrate funding or solvency. Let's take a numerical example of a pension fund that has assets of £120m and liabilities of £100m. Assume that the government has restricted the use of illiquid corporate bonds for the purposes of demonstrating solvency.

Assets:
Equities £80m
Liquid corporate bonds £20m
Illiqiuid corporate bonds £20m

Because the equities and liquid corporate bond values sum to £100m, the pension fund can claim to be fully funded (covering the £100m liabilities). However, by introducing this restriction the government has ensured that the pension fund is holding appropriate assets and can only invest more freely with the surplus funds. Hence, there's a restrictive element to it but it's not an outright restriction on exactly the assets the pension fund can hold.

Let me know if this is not clear.
Joe