Take (smoothed) risks when you are young, not when you are old: How to get the best from your pension plan |
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Authors: | Blake David |
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Institution: |
1 Pensions Institute, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, UK
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Abstract: | Using stochastic modelling, we demonstrate that the best investmentstrategy for the accumulation phase of a defined contributionpension plan is one that limits the range of returns that arecredited to the plan member's account. In particular, we showthat with-profit accumulation programmes which make use of asmoothing fund to smooth out returns over time dominate unit-linkedaccumulation programmes. However, for the distribution phase,we show that it is hard in practice for an investment-linkeddistribution programme to beat the income and security providedby a standard annuity, although we again find that, by avoidingextremely poor outcomes, with-profit distribution programmesdominate unit-linked distribution programmes. Return smoothingby means of a smoothing fund is therefore a valuable featureof any long-term investment programme both during the accumulationand distribution phases. |
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Keywords: | pension plan defined contribution stochastic modelling |
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