Search

This paper measures intergenerational transfers through the solidarity reserve of the newly proposed Dutch occupational pension contract. Our first conclusion is that the role of the solidarity reserve is higher than it may appear at a first glance. The fraction of pension savings that can go directly into the solidarity reserve is limited to 10%. However, we find that, in addition, around 30% of the pension savings of a young worker can subsequently be transferred to the solidarity reserve via a levy on future positive excess returns. Our second finding is that the solidarity reserve can introduce a substantial pay-as-you-go element within a funded pension scheme. This feature of the solidarity reserve can be overlooked easily and is not mentioned in the pension bill. Our policy recommendation to pension funds is to make explicit whether or not there is a pay-as-you-go element via the solidarity reserve, and if so to assess whether this is desirable.

We explicitly derive and explore the optimal consumption and portfolio policies of a loss-averse individual who endogenously updates his or her reference level over time. We find that the individual protects current consumption by delaying painful reductions in consumption after a drop in wealth, and increasingly so with higher degrees of endogeneity. The incentive to protect current consumption is stronger with a medium wealth level than with a high or low wealth level. Furthermore, this individual adopts a conservative investment strategy in normal states and typically a more aggressive strategy in good and bad states. Endogeneity of the reference level increases overall risk-taking and generates an incentive to reduce risk exposure with age even without human capital. The welfare loss that this individual would suffer under the conventional constant relative risk aversion (CRRA) consumption and portfolio policies easily exceeds 10%. This paper was accepted by Tyler Shumway, finance.

By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.

This paper explicitly derives the optimal dynamic consumption and portfolio choice of an individual with prospect theory preferences. The individual is loss averse, endogenously updates his reference level over time, and distorts probabilities. We show that the optimal consumption strategy is rather insensitive to economic shocks. In particular, in case the individual sufficiently overweights unlikely unfavorable events, our model generates an endogenous floor on consumption. As a result, an individual with prospect theory preferences typically implements a (very) conservative portfolio strategy. We discuss implications of our results for the design of investment-linked annuity products.

This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock–bond investments. We also show that in a setting that combines habit formation with Epstein–Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

By analyzing the portfolio allocations of Target Date Funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifi cally, we consider the impact of human capital, discount rate variation in the stock price, inflation risk and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65.

This paper models the decumulation period of a Personal Pension with Risk sharing (PPR). We derive several relationships between the contract parameters. Individuals can adopt two approaches to the decumulation period of a PPR: the investment approach and the consumption approach. In the investment approach individuals specify how to invest wealth and how much wealth to withdraw. Retirement consumption follows endogenously. In the consumption approach, in contrast, individuals specify retirement consumption exogenously. Investment and withdrawal policies follow endogenously. We explore these two approaches in detail. Consistent with habit formation, we allow for excess smoothness and excess sensitivity in retirement consumption.

This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities, by developing a non-trivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation a ffects the marginal propensity to consume and optimal stock-bond investments. We also show that in a setting which combines habit formation with Epstein-Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

© 2019 Elsevier B.V. This paper introduces a class of unit-linked annuities that extends existing annuities by allowing portfolio shocks to be gradually absorbed into the annuity payouts. Consequently, our new class enables insurers to offer an affordable and adequate annuity with a stable payout stream. We show how to price and adequately hedge the annuity payouts in a general financial environment. In particular, our model accounts for various stylized facts of stock returns such as asymmetry and heavy-tailedness. Furthermore, the generality of our framework makes it possible to explore the impact of a parameter misspecification on the annuity price and the hedging performance. ispartof: INSURANCE MATHEMATICS & ECONOMICS vol:86 pages:19-42 status: published

Individualisering van het pensioenstelsel maakt het mogelijk om leeftijdsafhankelijk te beleggen. Er is echter niet één optimale leeftijdsafhankelijke beleggingsmix: een modelmatige analyse laat zien dat de vormgeving van het beleggingsbeleid afhangt van ­individuele risicovoorkeuren en subjectieve inschattingen ten ­aanzien van rendementsverwachtingen en toekomstige inflatie.

The solidarity reserve is an element of the Dutch new pension system. This Topicality Paper explores how the solidarity reserve can be used to facilitate intergenerational risk sharing and how the withdrawal and deposit rules of the reserve should be designed. Based on an analysis of the academic literature and policy documents, we draw the following conclusions: 1. Policymakers attribute four goals to the solidarity reserve: i) sharing investment risks with future generations, ii) preventing unlucky and lucky generations, iii) sharing macro longevity risk with future generations and iv) sharing inflation risk with future generations. 2. The solidarity reserve makes it possible to share investment risks with future generations. Hence, the introduction of the solidarity reserve may potentially lead to an ex ante welfare gain. 3. Risk sharing with future generations does not prevent unlucky and lucky generations. 4. ‘Ex post steering’ using the solidarity reserve does not create an ex ante welfare gain. 5. The solidarity reserve is, in principle, not needed to facilitate risk sharing of macro longevity risk and inflation risk. 6. We recommend policymakers to investigate the possibility of a so-called protection return for inflation risk. A protection return for macro longevity risk has already been proposed in the current consultation document.

De lage rentes en de daardoor dreigende kortingen geven aan hoe belangrijk renterisico voor pensioenen is. Terwijl veel bekend is over het verdelen van aandelenrisico over de levenscyclus, staan er rond renterisico veel vragen open. Hoeveel moeten we ons indekken tegen renterisico? Wie kan het beste renterisico’s dragen: jongeren of ouderen? Hoe zit het met de verdeling van renterisico in de bestaande pensioencontracten? En welke lessen kunnen hieruit worden getrokken voor de toekomst? Deze Netspar Brief doet een poging antwoorden te geven op deze vragen op basis van recent wetenschappelijk onderzoek en door de theorie af te zetten tegen de praktijk in huidige pensioencontracten in Nederland.

This paper explicitly derives and explores optimal interest rate risk management for lifecycle investors in DC pension plans, and compares our results to the portfolio mix chosen in practice by Target-Date Fund (TDF) managers. We show that investments in long-term bonds play an important role in the portfolio of middle-aged individuals between ages 45 and 70. Our theoretical findings stand in sharp contrast with the investment choices made in practice; the role of long-term bonds is rather limited in the investment portfolios of 401(k) pension plan members in the US. Morningstar data on TDFs points out that the average bond duration is limited to five years and does not depend on age. We find that the absence of long-term bonds in the portfolio of a lifecycle investor can be costly, with the welfare loss peaking at 5 percent of consumption for middle-aged individuals.