Design of Pension Contracts in Incomplete Markets and under Uncertainty
Life-cycle funds are an increasingly important topic in discussions about retirement income, given the trend of moving from Defined Benefit (DB) to Defined Contribution (DC) pension plans. We have witnessed in recent years a rapid growth in the number of pension plans that offer life-cycle funds. Furthermore, the Dutch Social Economic Council (SER) has put forward reform proposals that suggest the creation of personal retirement accounts, combined with a collective risk-sharing component.
We know from the literature that the “optimal” strategy can be very sensitive to the specific formulation of the (mathematical) optimisation problem. This last observation highlights the central research questions we want to address in this project: how do perturbations of the life-cycle problem specification affect the optimal investment strategy? A closely related question is whether it is possible to find robust strategies that remain close to optimal for a set of alternative life-cycle problems specifications.
Due to the sustained pressure on pension systems, many countries are considering a redesign of their pension system. In The Netherlands this discussion is currently ongoing on the basis of the SER proposal. However, the exact details still have to be hammered out in the coming years. Social partners recognize that the shift of risks to participants is challenging and are therefore in search for collective risk sharing solutions to mitigate the participants’ exposures. We believe that insights from the academic literature and this research project can serve as valuable input for the social partners involved in this process.
