Dynamic Lifecycle Strategies for Target Date Retirement Funds

Basu, Anup K.; Byrne, Alistair; Drew, Michael E.

doi:10.2139/ssrn.1340963

Cited by 15 publications

(16 citation statements)

References 15 publications

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“…A possible idea may be explicitly introducing the minimum benefit B (0) and the maximum benefit B (1) , both of which are indexed to price or wage inflation, and making the portion between the maximum and the minimum benefits conditional on S416 S. Nobuhiro the funded status of the plan. Let L (0) denotes the amount of the liabilities corresponding to minimum benefits B (0) and L (1) denotes the amount of liabilities corresponding to maximum benefits B (1) .…”

Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

“…Let L (0) denotes the amount of the liabilities corresponding to minimum benefits B (0) and L (1) denotes the amount of liabilities corresponding to maximum benefits B (1) . The actual amount of benefits B is then given by the following formulae:…”

Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

“…Here the question is how to determine the minimum benefit B (0) and the maximum benefit B (1) . A possible idea may be setting the real value of the minimum benefit equivalent to the terminal value at the payout date of normal contributions applying annually the actual real long-term government bond rate of the year.…”

Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

“…Firstly, let us consider the case L (0) = L (1) . A candidate of such conditions may be restricting the severity of loss when the portfolio value could not have attained the liability value at any time before the payout year.…”

Section: Additional Conditions Restricting the Risk Of Funding Shortfmentioning

confidence: 99%

“…Secondly, let us consider the case L (0) \ L (1) . If the gap between the two liabilities is fairly large and b t = log(A t /C t ) [ 0, then we can introduce a condition that the log funded ratio Y u in comparison to the minimum liability value L (0) is absorbed into the lower barrier at some time 1 until the payout year with the probability less than some constant p 2 .…”

Section: Additional Conditions Restricting the Risk Of Funding Shortfmentioning

confidence: 99%

See 4 more Smart Citations

Economic values of contribution cashflows for a sponsoring employer of a DB pension plan and measures to bring the economic costs under control within an affordable range

Shimizu¹

2011

Eur. Actuar. J.

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In many countries defined-benefit pension plans experienced sudden and significant funding gaps caused by the asset price depreciation and the interest rate decline originated from the global financial crisis erupted in August 2007. This paper explores several measures to bring under control the economic costs of contributions from the aspects of benefit designs, funding standards, and investment strategies. On funding standards, this paper proposes payout-year differentiation of funding standards, under which assets and contributions are divided by payout year and loaded, respectively, on 'sequentially chained containers.' This payout-year specific (PYS) funding standard then specifies a sequence of minimum admissible funded ratios (MAFRs) each of which is assigned to the corresponding container. Each MAFR will be a function of the period from the measurement date to the payout year. The MAFRs will be derived assuming a hypothetical investment strategy of switching the speculative portfolio to a complete liability-hedging portfolio immediately when the amount of assets surpasses the value of corresponding liabilities. This PYS funding standard allows taking into account the expected excess returns on risky assets to some extent in the discount rates and thus enables us to reduce the volatility of contributions.

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Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

Section: Variation Of Benefit Designs and Evaluation Of Their Sustainmentioning

confidence: 99%

Section: Additional Conditions Restricting the Risk Of Funding Shortfmentioning

confidence: 99%

Section: Additional Conditions Restricting the Risk Of Funding Shortfmentioning

confidence: 99%

See 3 more Smart Citations

Economic values of contribution cashflows for a sponsoring employer of a DB pension plan and measures to bring the economic costs under control within an affordable range

Shimizu¹

2011

Eur. Actuar. J.

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show abstract

Reactive investment strategies

Leung

2011

Insurance: Mathematics and Economics

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The appropriateness of default investment options in defined contribution plans: Australian evidence

Basu

Drew

2010

Pacific-Basin Finance Journal

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For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant's wealth accumulation target at retirement as well as downside risk of falling below that target outcome by very aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence strongly suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth.Key words: defined contribution; default option; asset allocation; retirement wealth; downside risk. 1 IN MOST DEVELOPED COUNTRIES, THE COINCIDENCE of a rapidly aging population with a rising proportion of retirees is placing considerable pressure on current social security programs. This demographic trend has resulted in the benefits from social security becoming less certain for future retirees, unless there is a sharp increase in productivity. The situation has prompted policymakers to encourage funded private retirement plans (generally sponsored by employers or other private providers) known as defined contribution (DC) plans, where employee participants build up retirement savings through mandatory or voluntary contributions in their individual retirement accounts. Retirement benefits of participants in these plans are entirely dependent on the accumulation of plan contributions and investment returns earned on those assets. A growing trend in DC plans is to give the individual participants more control over investment of their plan assets. For instance, DC plan participants are expected to select an investment option from a menu of investment choices provided by the plan sponsor. This investment decision is critical because it determines future investment returns on their plan assets, and therefore, influences the wealth accumulated in the retirement account at the end of the participant's working life.A substantial body of recent research demonstrates that although members of retirement plans have the option to exercise choice, most accept the default arrangements in the plans. The work of Choi, Laibson, Madrian, and Metrick (2003) finds that American employees tend to ac...

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Dynamic Lifecycle Strategies for Target Date Retirement Funds

Cited by 15 publications

References 15 publications

Economic values of contribution cashflows for a sponsoring employer of a DB pension plan and measures to bring the economic costs under control within an affordable range

Economic values of contribution cashflows for a sponsoring employer of a DB pension plan and measures to bring the economic costs under control within an affordable range

Reactive investment strategies

The appropriateness of default investment options in defined contribution plans: Australian evidence

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