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Using a stochastic economic scenario generator to analyse uncertain superannuation and retirement outcomes

Published online by Cambridge University Press:  10 December 2020

Wen Chen Open the ORCID record for Wen Chen [Opens in a new window] ,
Bonsoo Koo ,
Yunxiao Wang ,
Colin O’Hare ,
Nicolas Langrené ,
Peter Toscas  and
Zili Zhu
Wen Chen*
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia
Bonsoo Koo
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia Department of Econometrics and Business Statistics, Monash University, Melbourne, VIC 3800, Australia
Yunxiao Wang
Affiliation:
Department of Econometrics and Business Statistics, Monash University, Melbourne, VIC 3800, Australia
Colin O’Hare
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia Department of Econometrics and Business Statistics, Monash University, Melbourne, VIC 3800, Australia
Nicolas Langrené
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia
Peter Toscas
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia
Zili Zhu
Affiliation:
RiskLab, Data61, the Commonwealth Scientific Industrial and Research Organisation (CSIRO), Australia
*
*Corresponding author. E-mail: wen.chen@csiro.au
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Abstract

The retirement systems in many developed countries have been increasingly moving from defined benefit towards defined contribution system. In defined contribution systems, financial and longevity risks are shifted from pension providers to retirees. In this paper, we use a probabilistic approach to analyse the uncertainty associated with superannuation accumulation and decumulation. We apply an economic scenario generator called the Simulation of Uncertainty for Pension Analysis (SUPA) model to project uncertain future financial and economic variables. This multi-factor stochastic investment model, based on the Monte Carlo method, allows us to obtain the probability distribution of possible outcomes regarding the superannuation accumulation and decumulation phases, such as relevant percentiles. We present two examples to demonstrate the implementation of the SUPA model for the uncertainties during both phases under the current superannuation and Age Pension policy, and test two superannuation policy reforms suggested by the Grattan Institute.

Keywords

SuperannuationEconomic scenarios generatorMonte Carlo simulationAge PensionRetirement income
Type
Original Research Paper
Information
Annals of Actuarial Science , Volume 15 , Issue 3 , November 2021 , pp. 549 - 566
Copyright
© Institute and Faculty of Actuaries 2020

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