Abstract
In this work, we consider rule-based investment strategies for managing a defined contribution pension savings scheme, under the Dutch pension fund testing model. We find that dynamic, rule-based investment strategies can outperform traditional static strategies, by which we mean that the investor may achieve the target retirement income with a higher probability or limit the shortfall when the target is not met. In comparison with dynamic programming-based strategies, the rule-based strategies have more stable asset allocations throughout time and avoid excessive transactions that may be hard to explain to an investor. We also study a combined strategy of a rule-based target with dynamic programming. A key feature of our setting is that there is no risk-free asset, instead, a matching portfolio is introduced for the investor to avoid unnecessary risk.
Highlights
Nowadays, many people invest their retirement savings in a defined contribution pension scheme
Our pension investor is only interested in reaching her replacement ratio target, i.e., not making the target is considered downside risk and she feels indifferent about any two values above the target
We discussed several dynamic strategies, suitable for pension investors that aim to replace a proportion of their salary with a retirement income
Summary
Many people invest their retirement savings in a defined contribution pension scheme. Our dynamic strategy will reduce risk after several years of good returns on investment. In addition to mean-variance that balances the mean and variance of returns, they studied a problem with a fixed wealth target To reduce risk, both [11] and [20] proposed to invest excess wealth in a risk-free asset. It is not straightforward to apply dynamic programming to the pension settings as an investor’s replacement ratio target often depends on inflation influencing the future, which in turn influences the future contributions. Compared with the work in [2], our rule-based strategies can reduce risk annually, and consider the market price of future pension payments instead of a wealth target. In addition to the rulebased strategies, we will study an integrated approach in which we combine a rulebased strategy with dynamic programming
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