Risk, Return and Portfolio Allocation Under Alternative Pension Arrangements with Imperfect Financial Markets

47 Pages Posted: 14 May 2001

See all articles by David Miles

David Miles

Imperial College Business School; The Bank of England; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Aleš Černý

Cass Business School, City, University of London

Date Written: March 2001

Abstract

This paper uses stochastic simulations on calibrated models to assess the steady state impact of different pension arrangements in an environment where financial markets are less than perfect. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system and where there are imperfections in financial markets (eg transactions costs or adverse selection). This paper calculates the expected welfare of agents in different economies where in the steady state the importance of unfunded, state pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts. We focus on the case of Japan where aging is rapid and unfunded pensions are currently generous.

Keywords: Pensions, Portfolio Allocation, Demographics, Annuities, Risk-Sharing

JEL Classification: H55, D91, G22, J14.

Suggested Citation

Miles, David Kenneth and Černý, Aleš, Risk, Return and Portfolio Allocation Under Alternative Pension Arrangements with Imperfect Financial Markets (March 2001). CESifo Working Paper Series No. 441; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=268968

David Kenneth Miles (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

The Bank of England ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Aleš Černý

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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