Defined contribution pension plans around the world report their performance in non-homogeneous ways to their members (Antolín and Harrison, 2012). A common feature they share is a focus on the returns obtained in the recent past. This practice does not necessarily convey information on longer-term returns, even if pension investment is for the long run. On the one hand, returns on assets may be close to unpredictable, in which case the past returns do not forecast future ones. On the other hand, projecting future outcomes given past performance is likely to exceed the household’s ability, even if the pension fund invested in assets with predictable returns. Some pension plans report expectations of future returns. However, this does not convey to pension members information on the range of future pension benefits, and on how possible outcomes depend on alternative asset allocations and levels of contribution.

This paper proposes a method for projecting pension benefits in future years until retirement given the contribution installments and the asset allocation chosen by the plan member. Importantly, projections provide the member information about the trade-off between higher returns and higher risk taking. It then elaborates on how the pension fund may compare its recent realized performance to its previous short-term forecasts, and revises its projections of benefits at retirement as a function of its own actual returns.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

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