1887

OECD Working Papers on Finance, Insurance and Private Pensions

Selected studies on finance, insurance and private pensions policy prepared for dissemination in order to stimulate wider discussion and further analysis and obtain feedback from interested audiences. The studies provide timely analysis and background on industry developments, structural issues, and public policy in the financial sector. Topics include risk management, governance, investments, benefit protection, and financial education. Previous papers addressing these policy issues are available via http://dx.doi.org/10.1787/19936397.

English

Assessing Default Investment Strategies in Defined Contribution Pension Plans

This paper assesses the relative performance of different investment strategies for different structures of the payout phase. In particular, it looks at whether the specific glide-path of life-cycle investment strategies and the introduction of dynamic features in the design of default investment strategies affect significantly retirement income outcomes. The analysis concludes that there is no ?one-size-fits-all? default investment option. Life cycle and dynamic investment strategies deliver comparable replacement rates adjusted by risk. However, life cycle strategies that maintain a constant exposure to equities during most of the accumulation period, switching swiftly to bonds in the last decade before retirement seem to produce better results and are easier to explain. Dynamic management strategies can provide somewhat higher replacement rates for a given level of risk than the more deterministic strategies, at least in the case of pay-outs in the form of variable withdrawals. The length of the contribution period also affects the ranking of the different investment strategies with life cycle strategies having a stronger positive impact the shorter is the contribution period.

English

Keywords: risk-management, retirement income, defined contribution pension plans, replacement ratios, investment, regulation
JEL: G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions; J14: Labor and Demographic Economics / Demographic Economics / Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination; D91: Microeconomics / Micro-Based Behavioral Economics / Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making; E21: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Macroeconomics: Consumption; Saving; Wealth; D14: Microeconomics / Household Behavior and Family Economics / Household Saving; Personal Finance; J26: Labor and Demographic Economics / Demand and Supply of Labor / Retirement; Retirement Policies; G38: Financial Economics / Corporate Finance and Governance / Corporate Finance and Governance: Government Policy and Regulation
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