Pensions products for heterogeneous agents accommodating for life events

The provision of income after retirement is in a state of flux. Traditionally, “one-size fits all” funded pension plans complemented the government schemes. Increasingly, however, the provision of retirement income can be tailored to individual characteristics and preferences. These developments have created a market for pension products such as tax-exempt savings plans and life-cycle investment funds. Such pension products aim to optimally allocate investment risks by taking investment risks that are attractive for the individual as they generate higher expected returns and avoiding investment risks that imply volatile pension income. This requires optimal diversification, optimal hedging of interest rate fluctuations, optimal exposure to illiquid assets etc. Likewise optimal contribution rates and optimal withdrawal of pension capital are vital (see e.g. Bovenberg et al. (2007) and Bovenberg and Nijman (2017a)). On top of managing investment risk, adequate sharing of longevity risk (De Waegenaere et al. (2016)) and the potential income drop because of the death of a partner (De Kort et al. (2017)) are design features of substantial importance to be incorporated in the product design.
An extensive academic literature analyses the design of pension products. The workhorse model is the so called Merton (1969) model that assumes riskless human capital, independent stock returns, constant interest rate, a fixed retirement date and a deterministic life length. This model is still the basis of life-cycle and target date pension products all over the world. The Merton model has important limitations though, which have been addressed in the academic literature. This project will challenge these limitations in more-depth and translate these new academic insights into attractive and sustainable pension products for the Dutch and European markets.