PORTFOLIO INSURANCE STRATEGIES FOR A TARGET ANNUITIZATION FUND

2020 ◽  
Vol 50 (3) ◽  
pp. 873-912
Author(s):  
Mengyi Xu ◽  
Michael Sherris ◽  
Adam W. Shao
Keyword(s):  
Optimal Investment ◽  
Retirement Income ◽  
Investment Strategies ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Minimum Level ◽  
Portfolio Insurance ◽  
Constant Proportion ◽  
Prior Literature ◽  
Risk Protection

AbstractThe transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies for DC pension funds focusing on retirement income targets. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member’s age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy generally leads to higher accumulated savings at retirement, whereas the constant proportion strategy provides better downside risk protection robust to equity market jumps/volatilities.

scholarly journals New Dutch pension contracts and lessons for other countries

2018 ◽  
Vol 18 (3) ◽  
pp. 331-346 ◽  
Author(s):  
LANS BOVENBERG ◽  
THEO NIJMAN
Keyword(s):  
Financial Risk ◽  
Contract Design ◽  
Retirement Income ◽  
Financial Assets ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Occupational Pensions ◽  
Systematic Risks ◽  
Recent Developments ◽  
Insurance Decisions

AbstractThis paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from the explicit objective of adequate and stable lifelong retirement income. The proposed system also involves an insurance contract pooling longevity risks and possibly collective buffers that share systematic risks with future pension savers. The paper identifies the strengths and weaknesses of the Dutch contract design and draws lessons for other countries.

scholarly journals Constant Proportion Portfolio Insurance Strategy in Southeast European Markets

2016 ◽  
Vol 7 (1) ◽  
pp. 59-80
Author(s):  
Elma Agić-Šabeta
Keyword(s):  
Investment Strategies ◽  
Government Bond ◽  
Portfolio Insurance ◽  
Risky Assets ◽  
Constant Proportion ◽  
Bond Returns ◽  
High Volatility ◽  
Government Bond Markets ◽  
Constant Proportion Portfolio Insurance ◽  
The Government

Abstract Background: In today’s highly volatile and unpredictable market conditions, there are very few investment strategies that may offer a certain form of capital protection. The concept of portfolio insurance strategies presents an attractive investment opportunity. Objectives: The main objective of this article is to test the use of portfolio insurance strategies in Southeast European (SEE) markets. A special attention is given to modelling non-risky assets of the portfolio. Methods/Approach: Monte Carlo simulations are used to test the buy-and-hold, the constant-mix, and the constant proportion portfolio insurance (CPPI) investment strategies. A covariance discretization method is used for parameter estimation of bond returns. Results: According to the risk-adjusted return, a conservative constant mix was the best, the buy-and-hold was the second-best, and the CPPI the worst strategy in bull markets. In bear markets, the CPPI was the best in a high-volatility scenario, whereas the buy-and-hold had the same results in low- and medium-volatility conditions. In no-trend markets, the buy-and-hold was the first, the constant mix the second, and the CPPI the worst strategy. Higher transaction costs in SEE influence the efficiency of the CPPI strategy. Conclusions: Implementing the CPPI strategy in SEE could be done by combining stock markets from the region with government bond markets from Germany due to a lack of liquidity of the government bond market in SEE.

Hybrid Cash Balance and Pension Equity Plans: Origins and Development

2021 ◽  
pp. 088636872110052
Author(s):  
John G. Kilgour
Keyword(s):  
The United States ◽  
Fortune 500 ◽  
Pension Plans ◽  
Retirement Income ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Fully Functioning ◽  
Small Employers ◽  
Do So

It is widely recognized that there has been a massive shift from defined-benefit (DB) to defined-contribution pension plans. However, the full extent of that shift from fully functioning DB plans is generally understated. This article measures and relates the extent of that understatement and its importance for retirement income. It then discusses the increasing importance of cash balance and pension equity plans and their legality. It then conducts an in-depth discussion of large (Fortune 500) employers, small- and medium-sized employers, and then very small employers (25 or fewer active participants). It concludes that retirement income plans in the United States are far from static. Indeed, they have evolved throughout the era and will continue to do so in the future.

Lifecycle derivatives and retirement income assurance using long-term debt

2007 ◽  
Vol 8 (3) ◽  
pp. 361-390
Author(s):  
ROGER J. BOWDEN
Keyword(s):  
Public Debt ◽  
Paradigm Shift ◽  
World Wide ◽  
Retirement Income ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Public Provision ◽  
Market Pricing ◽  
Private And Public

AbstractAs life tables continue to lengthen, a world-wide paradigm shift to defined contribution – but undefined rewards – has left pensioners exposed to performance, credit, and longevity risk. However, relatively risk-free defined benefit schemes can be designed off the back of high-grade debt issuance programmes by public long-term asset vehicles, as an infrastructure–retirement double play. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilize market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, one that exploits the externalities of a well-designed system of public debt.

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