FINA 1007 – Research Proposal Example 1

SHOULD BANKS IN UK INVEST THEIR PENSION FUNDS IN

EQUITY

Note: This research proposal has been uploaded to the University’s

anti-plagiarism software Turnitin.

1. INTRODUCTION

“Pension fund is a fund established by an employer to facilitate and

organise the investment of employees’ retirement funds contributed by the
employer and employees. The Pension fund is a common asset pool meant
to generate stable growth over the long term, and provide pensions for
employees when they reach the end of their working years and commence
retirement” (Investopedia.com). “Pension system is any arrangement the
main purpose of which is to provide a defined class of individuals (called
members of the scheme) with pensions. A pension scheme may include
benefits other than pension and may provide a pension for dependents of
deceased members” (Oxford Dictionary of Finance and Banking, 2005).

Pension is a fixed sum that is paid on a regular basis to a person who has
reached a specified age or is retired from his work. It is normally rewarded
from the date of reaching a specified age (normally 60-65) or retirement
age until death. A widow is provided with pension after her husband’s die.
Employee and employer both contribute toward the pension fund. In UK,
the London Pension Fund Authority (LPFA) is among the biggest local
government pension scheme having managing assets worth £3.7 billion
and having more than 73000 members (by Sep 2007). Until 1993 under
this scheme the assets and liabilities were managed as a single fund but it
was decided to split it into two different funds namely the Active sub-fund
and pensioner sub fund. The new funds created have different features like
the Active sub-fund which includes employers continue to invite new
member while the other fund namely Pensioner sub-fund restricted any
new members. Due to this, to properly match the definite nature of their
liabilities profile, there are material dissimilarities in that:

1
• The contributions of Active sub-fund assets are majorly invested in
equities on the contrary the contributions made towards Pensioner
sub-fund assets are invested in bonds.
• The members of Pensioner sub-fund have more average age; we can
say that Pension sub-fund is more mature now while on the other
hand the present members of Active sub-fund have less.

Since different pension plans have different proposed investment plan

that where the money contributed by the members will be invested so
that employees can be benefited and companies can get higher returns.
Some companies invest their pension funds in equities on the contrary
some in bonds. So here we will study the banking sector of United
Kingdom and look that where different banks invest their pension funds
to achieve better returns.

2. AIMS OF THE STUDY

The main aims of the research project are as follows:

• Provide an evaluative summary of the literature on Pension Funds in

UK
• Looking at the allocation of pension funds by the banks
• Looking at the results obtained from investment of pension funds in
both the markets.
• Looking which one among both i.e. equity and bond is preferred and
provides higher returns.

3. PROBLEM STATEMENT
In this research we will be looking at the main problem that “Should
Banks in UK invests their Pension Funds in Equities or Bonds?”
Basically we will review that which among the equity and the bond
market provides better returns over the period of time and is better from
the perspective of company and the employee. Here we will oversee the
annual reports of banks in which they illustrate the amount of pension
funds they invest in different markets and the returns they get from that
and also the types of products they invest the money from pension fund

2
 with them. The core research question in this research will be that
which market provides better returns.
Is that Bond Market or it is equity market? As pensions are very
essential part of a person as it is income from where he can rely his life
after he is retired from his job.

4. LITERATURE REVIEW (above sections to be expanded in

dissertation)

5. RESEARCH DESIGN

5.1 Data Collection

In this section we will firstly concentrate on the sources from which
data is collected. We will look at the annual reports of banks in UK
which shows their allocation of pension fund among different
alternatives and see the results that which of them provides higher
returns. The data used here is the secondary data which is collected
from the published reports of the banks in which they mention the
amount of pension fund invested and the results by looking at the
increase in the amount in the pension fund. These reports will be
considered as the base for the whole research as they will provide the
facts and figures on which market is giving higher profits.
The reason for choosing the secondary data as source of data is that we
can get the detailed information from the reports which they publish and
we can rely on the data provided as its published data the chances of
being wrong are less.

5.2 Data Preparation

Once the data is collected the researcher will start with preparing the
data means start editing, coding and entering data. This help to ensure
the accuracy of data conversion of raw data into form which is more
easy to use for data analysis.
Editing includes detecting errors and rectifying them so that standard
data is left for analysing. The aim of editing is that data is accurate,
uniformly entered, complete arranged into required order and is
complete. Coding covers giving symbols to responses so that they can
be grouped into categories or headings. Data entry includes conversion

3
of data gathered by different sources into a form for viewing and
manipulating.

5.3 Data Analysis

The handiness of data entry through spreadsheets or other data entry
programs helps to move quickly to statistical analysis of data. Data
analysis intends to view and summarise the data into a form which is
helpful in getting required information and getting to some conclusions.
Acc to Donald R. Cooper & Pamela S. Schindler (2006) data analysis is
divided into exploratory data analysis and descriptive data analysis. In
Exploratory data analysis the researcher has an ease to reply to the
pattern publicized in the preliminary data analysis. Hence pattern in
data collected guide the data analysis while confirmatory data analysis
is a process which is influenced by traditional statistical inference in its
use of essential testing. In this we will use the time series analysis as we
will study the market in which banks invest their pension funds over
past few years and the results they get by investing in different markets
i.e. Bond markets and Equity Markets.
Along with the time series analysis cross tabulation technique will also
be used as we will be comparing the results of investment of pension
fund in Bonds and Equities.
The reason for selecting the time series we will that we are looking at
the performance of the both equity and bond markets for past years
meaning how much return different markets have given to different
banks. As some banks have invested their funds in equities while some
have done so in bonds.

5.4 Testing of Hypothesis

Generally two types of Hypothesis are used namely Null Hypothesis
and Alternative Hypothesis. Null hypothesis is used so as to support an
alternative hypothesis. If one hypothesis is easier we give priority to it
so that more complicated theory is not adopted unless there is any
required evidence to support that instead of simple one. For Instance it
is easy to say that there exists no difference in flavour of pepsodent and
Colgate instead of saying there is any difference. There exist rivalry
among Null and Alternative hypothesis as it is believed that alternative
hypothesis is possibility that the effect is real while null hypothesis is

4
seen as a random chance of any event. The Null hypothesis is
represented by Ho.

There exist two types of errors in hypothesis testing namely Type I error
and type II error. Type I error occurs when the null hypothesis is not
accepted or is rejected when it is true i.e. Ho is wrongly rejected. Type I
error is an important error and its necessary to avoid such errors. Type
II error occurs when the null hypothesis is wrong and is not rejected as
well. If the size of sample is too small there are more chances of Type II
error.

6. SCOPE AND LIMITATION OF THE STUDY

Pensions are viewed as a secure future earning after the retirement of an

employee from his duties. The reason for selecting banks as a sample
for research being that banking is the fastest growing industry and
nowadays there have been many problems and many employees are
being terminated from their jobs. So to look that are these people’s
future safe means will they be able to get a good amount of pension
after their retirement and from the banks perspective to review that are
the money they are investing say in bonds are giving them good returns
or they can earn a much higher returns by investing in equities. Here we
will look at the major banking institutions and compare on the pension
fund allocation of these banks and the result they getting form of
profits. And come on to a decision that which market is gives higher
returns within past few years. The study will include an extensive study
of the pension fund allocation of banks among various assets in the
bond and equity markets like some may be investing some part in bonds
or some may be in hedge funds or other financial assets. Pensions are
very vast area of study and everyone looks pension just as they money
they will receive after the retirement but they don’t bother that how
small amount they contribute during the time of their job grows and
come to them as a means for fulfilling their basic needs. And there was
a need to see how the banks invest their pension funds and can come to

5
a conclusion that which market gets maximum returns over a period of
time.
Coming to the limitations of this study there seems to be limitation with
the fact we cannot have primary data on this area as we are looking at
the past results and we cannot get the insights from the banks that where
is the pension fund being invested by them. So the major limitation
seems to be in this concern as primary data is more reliable as you
collect that in your own. But the primary data also has a problem that it
can be biased.

REFERENCES:

• Byrne A. et all (2007)“Default Funds in UK Defined Contribution

Pension Plans”, Financial Analysts Journal
• John C. et all (2007), “Financial Risks and the Pension Protection
Fund: Can it survive them?”
• Mayer. C et all (2007), “Sources of Funds and Investment
activities of Venture Capital Funds: Evidence from Germany,
Israel, UK And Japan”, University of Oxford
• Donald R. Cooper & Pamela S. Schindler (2006), “Business
Research Methods”, McGraw Hill , Ninth Edition.
• Oxford Dictionary of Banking and Finance
• Sanjeev Bhojraj (2003), “ How Does the Corporate Bond market
Value capital investments and accruals?” Cornwell, University