The shift from DB to hybrid and DC pension plans shifts the investment risk from the corporate sector to households. This also implies that participants are provided with the option to exercise choice. However, most participants of DC pension plans ‘choose not to choose’ and, thus, end up in the default investment mix. Most pension providers hold on to a ‘one size fits all’ life cycle based default investment option. Heterogeneous factors such as the size and design of the first pillar, the wage level and career path, work interruptions and additional personal wealth are often not taken into account when determining the risk preferences of the participant regarding the default investment mix.In this thesis the influence of differences in the size and design of the first pillar together with different wage levels and career paths on the optimal default investment strategy is researched. This is done by using simulations to predict the development of income and first and second pillar pension accumulation and decumulation, the expected risk return distribution of the replacement rate for different participants is predicted for different life cycle investment options of the DC pension plan, varying from very defensive to very offensive. A mean-variance utility function is used to evaluate this risk-return distribution. The analysis shows that the relative size of the first pillar as a percentage of total pension income is of crucial importance for the optimal default investment option, where the investment mix should be more offensive the larger the relative size of the first pillar. A distinction between different countries and different wage levels and career paths is made to show the effect of these factors on the relative size of the first pillar. All these factors have a significant influence on the relative size of the first pillar, and, thus on the optimal DC default investment option. Therefore, pension providers should take into account these factors when determining the risk preferences of the participant regarding the default asset allocation and acknowledge that there is no ‘one size fits all’ default investment strategy.

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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