A Multi-Objective Decision Framework for Lifecycle Investment

In this paper we propose a multi-objective decision framework for lifecycle investment choice. Instead of optimizing individual strategies with respect to a single-valued objective, we suggest evaluation of classes of strategies in terms of the quality of the tradeoffs that they provide. The proposed framework takes inspiration from psychological theories which, on the one hand, assert that humans analyze risky choice situations in terms of several competing factors, and, on the other hand, recognize that attribute overload is detrimental to decision making. In particular, we use SP/A (security-potential/aspiration) theory as developed by Lopes and co-authors. The proposed approach is illustrated in a simple lifecycle model. As decision factors, we consider (a) the contribution paid, (b) the ambition level (targeted level of retirement income), and (c) the guarantee level (a level of retirement income that will be achieved with high probability). In terms of the tradeoffs generated between these indices, we compare a class of traditional lifecycle strategies, defined in terms of a glide path, with a class of so called collar strategies

Pension funds and value-based generational accounting

The raison d tre of wage-indexed defined benefit pension funds is to provide insurance against standard-of-living risk after retirement, based on intergenerational risk sharing. Pension funds necessarily have to accept mismatch risk in providing this kind of insurance. Mismatch risk taken by the pension fund is risk for the fund s stakeholders. We combine the value-based approach and the method of generational accounting to analyze the economic value of the stakes of the different generations and the issue of who gains and who loses (transfers of value between generations) from alternative funding and indexation policies. Rules concerning the allocation of a funding surplus or funding shortage in particular are decisive to the direction and to the size of transfers of value between stakeholders. We put forward two criteria to evaluate alternative policies employed by pension funds: the funding policy and allocation rules must give an ex ante fair compensation for risk taken by generations and the sustainability of a pension plan must be checked with respect to ex post redistributive effects for current and future generations. Value-based generational accounting provides a tool for testing a pension fund policy for these two criteria.

Projecting methods for pension and social security financing Valuation of intergenerational transfers in funded collective pension schemes Valuation of intergenerational transfers in funded collective pension schemes *

Abstract This paper applies contingent claim analysis to value pension contracts for real-life collective pension plans with intergenerational risk sharing and offering DB-like benefits. We rewrite the balance sheet of such a pension fund as an aggregate of embedded generational options. This implies that a pension fund is a zero-sum game in value terms, so any policy change inevitably leads to value transfers between generations. We explore intergenerational value transfers that may arise from a plan redesign or from changes in funding policy and risk sharing rules. We develop a stochastic framework which accounts for time-varying investment opportunities and computes the embedded generational options. Changes in the values of the generational options enable us to evaluate the impact of policy modifications in the pension contract with respect to intergenerational transfers and redistribution. We find that a switch to a less risky asset mix is beneficial to elderly members at the expense of younger members who lose value. A reallocation of risk bearing from a plan with flexible contributions and fixed benefits to a plan with fixed contributions and flexible benefits leads to value redistribution from older plan members to younger ones