Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts

27 Pages Posted: 7 Sep 2006

See all articles by Carlos Vidal-Meliá

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics

Inmaculada Domínguez-Fabián

University of Extremadura - Department of Economics

José Enrique Devesa-Carpio

University of Valencia - Faculty of Economics

Abstract

This article aims to quantify the aggregate subjective economic risk to which beneficiaries would be exposed if a retirement pension system based on notional account philosophy were introduced. We use scenario generation techniques to make projections of the factors that determine the real expected internal rate of return (IRR) and the expected replacement rate (RR) for the beneficiary according to six retirement formulae based on the most widely accepted rates or indices. We then apply the model to the case of Spain. Our projections are based on Herce and Alonso's macroeconomic scenario 2000-2050 (2000) and include information about the past performance of the indices and the time period the forecast is to cover. The results of the IRR calculation - average value, standard deviation, and value-at-risk (VaR) - are analyzed both in objective terms and for different degrees of participants' risk aversion.

Suggested Citation

Vidal-Meliá, Carlos and Domínguez-Fabián, Inmaculada and Enrique Devesa-Carpio, José, Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts. Journal of Risk & Insurance, Vol. 73, No. 3, pp. 489-515, September 2006, Available at SSRN: https://ssrn.com/abstract=928733 or http://dx.doi.org/10.1111/j.1539-6975.2006.00185.x

Carlos Vidal-Meliá (Contact Author)

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Inmaculada Domínguez-Fabián

University of Extremadura - Department of Economics ( email )

Avda. de Elvas s/n
06071 Badajoz
Spain

José Enrique Devesa-Carpio

University of Valencia - Faculty of Economics ( email )

Valencia, E-46022
Spain

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