Article ID: | iaor20062601 |
Country: | United Kingdom |
Volume: | 14 |
Issue: | 2 |
Start Page Number: | 145 |
End Page Number: | 161 |
Publication Date: | Apr 2003 |
Journal: | IMA Journal of Management Mathematics (Print) |
Authors: | Blake David |
Keywords: | finance & banking |
Using stochastic modelling, we demonstrate that the best investment strategy for the accumulation phase of a defined contribution pension plan is one that limits the range of returns that are credited to the plan member's account. In particular, we show that with-profit accumulation programmes which make use of a smoothing fund to smooth out returns over time dominate unit-linked accumulation programmes. However, for the distribution phase, we show that it is hard in practice for an investment-linked distribution programme to beat the income and security provided by a standard annuity, although we again find that, by avoiding extremely poor outcomes, with-profit distribution programmes dominate unit-link distribution programmes. Return smoothing by means of a smoothing fund is therefore a valuable feature of any long-term investment programme both during the accumulation and distribution phases.