Does a higher equity exposure increase the risk of a coverage deficiency?
With a higher equity ratio, the volatility of the investments increases, which means the cover ratio also fluctuates more than with a conservative investment strategy. This also increases the risk of a temporary coverage deficiency. With a solidly financed pension fund, a temporary coverage deficiency is no cause for concern. Since it can invest its pension assets with a high equity ratio, any coverage deficiency is usually compensated for as soon as the market recovers.
Coverage deficiency is problematic when a pension fund is poorly financed and there is a lot of redistribution. Since such funds inevitably have a lower equity ratio, they benefit less from recovery after a downturn. It therefore takes longer for them to make up the coverage deficiency.