Accumulating approach to the life-cycle pension model: practical advantages

Azoulay, Yaniv; Kudryavtsev, Andrey; Shahrabani, Shosh

doi:10.3326/fintp.40.4.3

Cited by 2 publications

(2 citation statements)

References 18 publications

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“…The seminal papers on that issue (such as Bodie and Crane (1997) and Bodie et al (2004)) are reviewed by Bodie et al in Bodie et al (2010) (where human capital is a highlighted factor). These theoretical studies are consistent with the recent empirical evidence such as that provided in Azoulay et al (2016) and Gabudean et al (2021).…”

Section: Connection With the Literaturesupporting

confidence: 92%

On Valuation and Investments of Pension Plans in Discrete Incomplete Markets

Anthropelos,

Blontzou

2023

Risks

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We study the valuation of a pension fund’s obligations in a discrete time and space incomplete market model. The market’s incompleteness stems from the non-replicability of the wage process that finances the pension plan through time. The contingent defined-benefit liability of the pension fund is a function of the wages, which can be seen as the payoff of a path-dependent derivative security. We apply the notion of the super-hedging value and propose its difference from the current pension’s fund capital as a measure of distance to liability hedging. The induced closed-form expressions of the values and the related investment strategies provide insightful comparative statistics. Furthermore, we use a utility-based optimization portfolio to point out that in cases of sufficient capital, the application of a subjective investment criterion may result in heavily different strategies than the super-hedging one. This means that the pension fund will be left with some liability risk, although it could have been fully hedged. Finally, we provide conditions under which the effect of a possible early exit leaves the super-hedging valuation unchanged.

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Section: Connection With the Literaturesupporting

confidence: 92%

On Valuation and Investments of Pension Plans in Discrete Incomplete Markets

Anthropelos,

Blontzou

2023

Risks

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“…According to Azoulay et al (2016), life-cycle funds have gained favour with retirement plan participants in recent years because they offer robust portfolio growth in the beginning of accumulation and the preservation of accumulated wealth before retirement. Also there is no need for participants to keep a constant watch on their investment strategy.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal Life-Cycle Investment Strategy in Lithuanian Second Pension Pillar

Medaiskis¹,

Gudaitis²,

Mečkovski³

2018

IJoES

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The proposition to introduce life-cycle investment strategy as a default option in second pension pillar in Lithuania is currently being intensely discussed as a measure to solve the problems of the irrational behaviour of pension fund participants. The latest analysis has shown that the majority of participants have selected an inappropriate pension fund (investment strategy and investment risk) while evaluating the accumulation period that they have left till the retirement. Moreover, most of them are not active and do not change the pension fund during accumulation period. The life-cycle investment strategy allows participants to switch automatically and gradually from one asset allocation to another as they get closer to retirement. Therefore, such dynamic asset allocation must have a strong analytical foundation. The goal of the study is to evaluate the optimal life-cycle investment strategy in the Lithuanian second pension pillar. In order to achieve this goal, the authors prepared a quantitatively calibrated model that closely follows such works as Cocco et al. (2005), Bagliano et al. (2009) and Blake et al. (2008). The model takes into account the specifics of the Lithuanian market such as contribution rates, the investment performance of pension funds, and participant's labour income process. In this paper, the authors use the optimization problem, where participant's utility is maximized only by the selected investment strategy (without consumption). The results show that from the beginning of accumulation period (the age of 20) till the age of approximately 42 years it is most rational to invest a high proportion of participant's pension assets into equities. Then optimal asset allocation is gradually switching from equities to less risky assets (e.g. government bonds) as the retirement age (65) approaches, where only 19 per cent of assets are invested into equities. The paper consists of three main parts: literature review, the explanation of the model and calibrated parameters that were used to evaluate the optimal life-cycle investment strategy, and main simulation results, including benchmark and sensitivity analysis.

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Accumulating approach to the life-cycle pension model: practical advantages

Abstract: yaniv azoulay, andrey kudryavtsev and shosh shahrabani: accumulating approach to the life-cycle pension model: practical advantages financial theory and practice 40 (4) 413-436 (2016)

Cited by 2 publications

References 18 publications

On Valuation and Investments of Pension Plans in Discrete Incomplete Markets

On Valuation and Investments of Pension Plans in Discrete Incomplete Markets

Optimal Life-Cycle Investment Strategy in Lithuanian Second Pension Pillar

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