Risk-managed Collective Pension Schemes with Intergenerational Benefit Smoothing

Abstract

In view of the repeated severe market downturns since the turn of the century, the interest in risk-based investment strategies has grown in recent years. However, such strategies have not yet made major inroads into the design of pension programs. In this paper, we fill this gap by combining a risk-managed investment strategy with a pension scheme where benefits are smoothed across generations by establishing a collective reserve. We demonstrate that combining the two helps to improve the performance of the pension investments and decreases the risk of a negative reserve in times of a market crisis. We furthermore investigate the implications of imposing varying degrees of diversification across assets in such a scheme.

Keywords: collective defined-contribution pla, risk-sharing

JEL Classification: C58, G11, H55, H75