Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-10T13:18:00.989Z Has data issue: false hasContentIssue false
  • English
  • Français

PORTFOLIO INSURANCE STRATEGIES FOR A TARGET ANNUITIZATION FUND

Published online by Cambridge University Press:  01 July 2020

Mengyi Xu Open the ORCID record for Mengyi Xu [Opens in a new window] ,
Michael Sherris Open the ORCID record for Michael Sherris [Opens in a new window]  and
Adam W. Shao
Mengyi Xu*
Affiliation:
School of Risk and Actuarial Studies and ARC, Centre of Excellence in Population Ageing Research (CEPAR), UNSW Sydney, Level 3, East Wing, 223 Anzac Parade, Kensington, NSW2033, Australia, E-Mail: m.xu@unsw.edu.au
Michael Sherris
Affiliation:
School of Risk and Actuarial Studies and ARC, Centre of Excellence in Population Ageing Research (CEPAR), UNSW Sydney, Kensington, Australia, E-Mail: m.sherris@unsw.edu.au
Adam W. Shao
Affiliation:
ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW Sydney, Kensington, Australia, E-Mail: adam.w.shao@gmail.com
*
E-Mail: m.xu@unsw.edu.au
Get access Rights & Permissions [Opens in a new window]

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 for DC pension funds focusing on retirement income targets. 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 generally leads to higher accumulated savings at retirement, whereas the constant proportion strategy provides better downside risk protection robust to equity market jumps/volatilities.

Keywords

Portfolio insurance strategiesdefined contributionpension risk managementtarget annuitization fundG11G22G23D14D15C63
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 50 , Issue 3 , September 2020 , pp. 873 - 912
Copyright
© 2020 by Astin Bulletin. All rights reserved

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Association of Superannuation Funds of Australia (2017) ASFA Retirement Standard detailed budget breakdowns March quarter 2017. Report. ASFA Research and Resource Centre, Sydney.Google Scholar
Balder, S., Brandl, M. and Mahayni, A. (2009) Effectiveness of cppi strategies under discrete-time trading. Journal of Economic Dynamics and Control, 33(1), 204–220.CrossRefGoogle Scholar
Battocchio, P. and Menoncin, F. (2004) Optimal pension management in a stochastic frame-work. Insurance: Mathematics and Economics, 34(1), 79–95.Google Scholar
Bernard, C. and Kwak, M. (2016) Dynamic preferences for popular investment strategies in pension funds. Scandinavian Actuarial Journal, 2016(5), 398–419.CrossRefGoogle Scholar
Bertrand, P. and Prigent, J.-l. (2005) Portfolio insurance strategies: OBPI versus CPPI. FINANCE- PARIS-, 26(1), 5–24.Google Scholar
Bertrand, P. and Prigent, J.-l. (2011) Omega performance measure and portfolio insurance. Journal of Banking & Finance, 35(7), 1811–1823.CrossRefGoogle Scholar
Binswanger, J. and Schunk, D. (2012) What is an adequate standard of living during retirement? Journal of Pension Economics & Finance, 11(2), 203–222.CrossRefGoogle Scholar
Black, F. and Jones, R.W. (1987) Simplifying portfolio insurance. The Journal of Portfolio Management, 14(1), 48–51.CrossRefGoogle Scholar
Black, F. and Perold, A.F. (1992) Theory of constant proportion portfolio insurance. Journal of Economic Dynamics and Control, 16(3), 403–426.CrossRefGoogle Scholar
Blake, D., Cairns, A.J.G. and Dowd, K. (2001) Pensionmetrics: Stochastic pension plan design and value-at-risk during the accumulation phase. Insurance: Mathematics and Economics, 29(2), 187–215.Google Scholar
Blake, D., Cairns, A.J.G. and Dowd, K. (2008) Turning pensions plans into pension planes: What investment strategy designers of defined contribution pension plans can learn from commercial aircraft designers. Discussion Paper PI–0806. Pensions Institute.CrossRefGoogle Scholar
Blake, D., Wright, D. and Zhang, Y. (2013) Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion. Journal of Economic Dynamics and Control, 37(1), 195–209.CrossRefGoogle Scholar
Blake, D., Wright, D. and Zhang, Y. (2014) Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners. Journal of Economic Dynamics and Control, 38, 105–124.CrossRefGoogle Scholar
Boulier, J.-F., Huang, S. and Taillard, G. (2001) Optimal management under stochastic interest rates: The case of a protected defined contribution pension fund. Insurance: Mathematics and Economics, 28(2), 173–189.Google Scholar
Boyle, P.P. and Vorst, T. (1992) Option replication in discrete time with transaction costs. Journal of Finance, 47(1), 271–293.CrossRefGoogle Scholar
Brennan, M.J. and Xia, Y. (2002) Dynamic asset allocation under inflation. Journal of Finance, 57(3), 1201–1238.CrossRefGoogle Scholar
Brown, J.R. (2009) Understanding the role of annuities in retirement planning. In Overcoming the Savings Slump: How to Increase the Effectiveness of Financial Education and Saving Programs (eds. Lusardi, A.), Chapter 6, pp. 178–206. Chicago, IL: University of Chicago Press.Google Scholar
Bureau of Labor Statistics, U.S. Department of Labor (2017) Labor productivity growth since the Great Recession. The Economics Daily. Available at https://www.bls.gov/opub/ted/2017/labor-productivity-growth-since-the-great-recession.htm (visited December 13, 2018).Google Scholar
Cairns, A.J.G., Blake, D. and Dowd, K. (2006) Stochastic lifestyling: Optimal dynamic as- set allocation for defined contribution pension plans. Journal of Economic Dynamics and Control, 30(5), 843–877.CrossRefGoogle Scholar
Financial System Inquiry (2014) Financial System Inquiry Final Report. Canberra: Common- wealth of Australia.Google Scholar
Geman, H., El Karoui, N. and Rochet, J.-C. (1995) Changes of numeraire, changes of probability measure and option pricing. Journal of Applied Probability, 32(2), 443–458.CrossRefGoogle Scholar
Guan, G. and Liang, Z. (2014) Optimal management of DC pension plan in a stochastic interest rate and stochastic volatility framework. Insurance: Mathematics and Economics, 57, 58–66.Google Scholar
Han, N.-w. and Hung, M.-w. (2012) Optimal asset allocation for DC pension plans under inflation. Insurance: Mathematics and Economics, 51(1), 172–181.Google Scholar
Harmer, J. (2008) Pension review. Background paper. Available at https://www.dss.gov.au/our-responsibilities/seniors/publications-articles/pension-review-background-paper?HTML. Department of Families, Housing, Community Services and Indigenous Affairs.Google Scholar
Holzmann, R., Paul, R. and Dorfman, M. (2008) Pension systems and reform conceptual framework. Social Protection Discussion Papers No. 0824. The World Bank.Google Scholar
Impavido, G., Lasagabaster, E. and García-Huitrón, M. (2012) New Policies for Defined Contribution Pensions: Industrial Organization Models and Investment Products. Washington DC: The World Bank.Google Scholar
Jamshidian, F. (1989) An exact bond option formula. Journal of Finance, 44(1), 205–209.CrossRefGoogle Scholar
Leland, H.E. (1980) Who should buy portfolio insurance? Journal of Finance, 35(2), 581–594.CrossRefGoogle Scholar
Merton, R.C. (1976) Option pricing when underlying stock returns are discontinuous. Journal of Financial Economics, 3(1-2), 125–144.CrossRefGoogle Scholar
Pézier, J. and Scheller, J. (2011) Optimal investment strategies and performance sharing rules for pension schemes with minimum guarantee. Journal of Pension Economics and Finance, 10(1), 119–145.CrossRefGoogle Scholar
Pézier, J. and Scheller, J. (2013) Best portfolio insurance for long-term investment strategies in realistic conditions. Insurance: Mathematics and Economics, 52(2), 263–274.Google Scholar
Schwert, G.W. (2011) Stock volatility during the recent financial crisis. European Financial Management, 17(5), 789–805.CrossRefGoogle Scholar
Temocin, B.Z., Korn, R. and Selcuk-Kestel, A.S. (2018) Constant proportion portfolio insurance in defined contribution pension plan management under discrete-time trading. Annals of Operations Research, 260(1-2), 515–544.CrossRefGoogle Scholar
Viceira, L.M. (2009) Life-cycle funds. In Overcoming the Saving Slump: How to Increase the Effectiveness of Financial Education and Saving Programs (ed. Lusardi, A.), Chapter 5, pp. 140–177. Chicago, IL: University Of Chicago Press.Google Scholar
Wu, L. (2003) Jumps and dynamic asset allocation. Review of Quantitative Finance and Accounting, 20(3), 207–243.CrossRefGoogle Scholar
Zagst, R. and Kraus, J. (2009) Stochastic dominance of portfolio insurance strategies. Annals of Operations Research, 185(1), 75–103.CrossRefGoogle Scholar