| Summary: | In this paper, it is investigated whether government, when promises pension fund’s members a so-calledminimum guaranteed return, to reduce the exposure of members to financial risks , should at the same timehinders portfolio diversification process of pension funds. We provide a detailed analysis of the connectionbetween the requirements for providing a minimum guaranteed return and managing financial risks on the onehand and the investment structure of pension funds on the other. We intend to demonstrate with an illustrativecase, using the simulation technique and a combination of actual data and some hypothetical one, that byprecisely matching the investments' characteristics to the characteristics of the pension fund's liabilities, someimportant financial risks can even be hedged entirely. We also intend to demonstrate that with theimplementation of a proper policy of risk measurement and management, complemented with stress testingpractices, excessive legislative restrictions for investments are no longer necessary. At the very least,governments should avoid implementing legislation that hinders the portfolio diversification process andtherefore makes pension fund risk management more difficult.
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