Pension funds, life-cycle asset allocation and performance evaluation

Adopting a life-cycle perspective, this chapter explores a number of the key methodological issues that must be resolved to include other determinants of optimal portfolios for retirement, such as other sources of retirement income, volatility of labor earnings, and potential correlations between financial and labor markets. The methods proposed are then used to develop a simple model that is calibrated to deliver quantitative estimates of an optimal portfolio allocation for DC pension funds of various characteristics and evaluate the sensitivity of the asset allocation within this portfolio to variations of the parameters from which it is derived. The discussion then addresses practical issues in the application of a theoretically optimal portfolio by considering whether the cost of implementation is likely to be associated with commensurate welfare gains, and it concludes by proposing a welfare-based performance metric.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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