Against the background of increasing challenges within the European Union related to ageing societies, a prevailing low interest environment, increasingly mobile life and work across the EU and the general distribution of wealth, several stakeholders within the EU have acknowledged the need to support the adequacy of national public pension schemes. This resulted in the conception of a Pan-European Personal Pension Product (PEPP), voluntary and portable across the European Economic Area (EEA), aiming at combining profitability, transparency as well as the security and quality of the related investments. Embedded into the greater scheme of the aspired European Capital Markets Union, PEPP is intended as simple and affordable savings option for everyone with the goal of closing the pension gap. This paper revisits the process towards the current, finalized state of PEPP, exploring its product features, regulatory requirements and key challenges with regard to the possible emergence of products since 2022.
PurposeThe aim of this paper is to modify the shape of utility functions traditionally used in expected utility theory (EUT) to derive optimal retirement saving decisions. Inspired by current reference point based approaches, the authors argue that utility functions with jumps or kinks at certain threshold points might very well be rational.Design/methodology/approachThe authors suggest an alternative to typical utility functions used in EUT, to be applied in the context of retirement saving decisions. The authors argue that certain elements that are used to model biases in behavioral models should–in the context of optimal retirement saving decisions–be considered “rational” and hence be included in a normative setting as well. The authors compare the optimal asset allocation derived under such utility functions with results under traditional power utility.FindingsThe authors find that the considered threshold levels can have a significant impact on the optimal investment decision for some individuals. In particular, the authors show that a much riskier investment than under EUT can become optimal if some level of income is secured by a social security and a significant portion of the distribution of terminal wealth lies below this level.Originality/valueContrary to previous work, this model is especially designed to assess the question of optimal product choice/asset allocation in the specific setting of retirement planning and from a normative point of view. In this regard, the authors first motivate the use of several thresholds and then apply this approach in a capital market model with stochastic stocks and stochastic interest rates to two illustrative investment alternatives.
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