Abstract
Defined contribution (DC) pension schemes expose their participants to a significant
amount of uncertainty regarding their pension capital at retirement. Traditional lifecycle
investment strategies are based on maximizing the return of the investment
portfolio based on a utility function with constant relative risk-aversion (CRRA). We
explore the impact of using a different utility specification, where we assume that participants assess utility relative to a benchmark at retirement and that the utility function has a non-constant relative risk-aversion. Due to this alternative utility specification, we obtain investment strategies that explicitly attempt to attain the benchmark at retirement. As a result, the uncertainty of the pension capital relative to the benchmark is reduced significantly compared to traditional life-cycle investment strategies.
amount of uncertainty regarding their pension capital at retirement. Traditional lifecycle
investment strategies are based on maximizing the return of the investment
portfolio based on a utility function with constant relative risk-aversion (CRRA). We
explore the impact of using a different utility specification, where we assume that participants assess utility relative to a benchmark at retirement and that the utility function has a non-constant relative risk-aversion. Due to this alternative utility specification, we obtain investment strategies that explicitly attempt to attain the benchmark at retirement. As a result, the uncertainty of the pension capital relative to the benchmark is reduced significantly compared to traditional life-cycle investment strategies.
| Original language | English |
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| Publisher | Netspar |
| Number of pages | 32 |
| Publication status | Published - 2020 |
Publication series
| Series | Netspar Design Paper |
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| Number | 163 |