Portfolio Insurance Strategies for a Target Annuitization Fund

41 Pages Posted: 11 Jul 2019

See all articles by Mengyi Xu

Mengyi Xu

UNSW Sydney; University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Adam Wenqiang Shao

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR); Milliman

Date Written: July 11, 2019

Abstract

The transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies, especially for target annuitization funds. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member's age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy often leads to higher accumulated savings at retirement and is also shown to provide a more robust level of protection when equity markets are more volatile and when contributions to the pension fund are lower.

Keywords: portfolio insurance strategies, defined contribution, pension risk management, target annuitization fund

JEL Classification: G11, G22, G23, D14, D15, C63

Suggested Citation

Xu, Mengyi and Sherris, Michael and Shao, Adam Wenqiang, Portfolio Insurance Strategies for a Target Annuitization Fund (July 11, 2019). Available at SSRN: https://ssrn.com/abstract=3417818 or http://dx.doi.org/10.2139/ssrn.3417818

Mengyi Xu (Contact Author)

UNSW Sydney ( email )

Level 3
223 Anzac PDE
Sydney, New South Wales NSW 2052
Australia

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 3
223 Anzac PDE
Sydney, New South Wales NSW 2052
Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Adam Wenqiang Shao

University of New South Wales - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

CEPAR, Level 3
East Wing, NICTA Building, UNSW
Sydney, New South Wales NSW 2052
Australia

Milliman ( email )

One Pennsylvania Plaza 38th Floor
New York, NY 10119
United States

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