Optimal investment strategies for Defined Contribution pension plans in the accumulation phase

Details

Supervisors

Devolder, Pierre

Faculty

Faculté des sciences

Degree label

Master [120] en sciences actuarielles, à finalité spécialisée

Abstract

With the growing importance of Defined Contribution pension plans in the second pillar of pension systems around the world, finding the optimal investment strategy is becoming paramount to the level of retirement capital that future retirees can expect to receive. In this study, we analyse different types of investment strategies, both static (either fictional or real-life) and Life-Cycle strategies. We compare them on various choice criteria in the context of Belgian occupational pension plans, which includes a minimum guaranteed return on the contributions. According to us, the most relevant decision metric is either what we will call a “replacement ratio” (from the viewpoint of the plan participants), or the expected compensation to be paid by the pension plan if the return is below the minimum guarantee (from the viewpoint of the pension plan itself). After optimizing our Life-Cycle strategies according to their diversification ratio, we find that from the viewpoint of plan participants, due to the existence of the minimum guarantee, the optimal investment strategy is the one with the highest possible allocation to Equities. From the viewpoint of the pension plan however, a (defensive) Life-Cycle strategy can be optimal in the sense that it minimizes the amounts to be compensated due to the guarantee. Our results have been tested with multiple sensitivity analyses, which support our conclusions.