The Recovery Potential for Underfunded Pension Plans

“Less risk-averse investment strategies improve recovery in disadvantageous scenarios”

Pension funds have the ambition to provide participants with an income stream after retirement that maintains their standard of living in real terms. Low interest rates since 2008 have made it harder for pension funds to meet this real ambition for their participants. Measured in real terms (i.e. including price indexation), Dutch pension funds are severely underfunded. In this paper we ask the question: which investment strategy can best be deployed to maximise the probability of reaching a “real ambition”?

Key Takeaway for the Industry

Optimisation based on preferences with a defined ambition can generate good investment strategies whenever the market value of the “ambition” is higher than the contributions.