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How good are default investment policies in defined contribution pension plans?

Published online by Cambridge University Press:  13 July 2020

Daniel Duque ,
David P. Morton  and
Bernardo K. Pagnoncelli
Daniel Duque
Affiliation:
Department of Industrial Engineering & Management Sciences, Northwestern University, Evanston, IL, USA
David P. Morton
Affiliation:
Department of Industrial Engineering & Management Sciences, Northwestern University, Evanston, IL, USA
Bernardo K. Pagnoncelli*
Affiliation:
Department of Industrial Engineering & Management Sciences, Northwestern University, Evanston, IL, USA School of Business, Universidad Adolfo Ibáñez, Santiago, Chile
*
*Corresponding author. Email: bernardo.pagnoncelli@uai.cl
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Abstract

Defined contribution (DC) pension plans have been gaining ground in the last 10–20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the existing default policy under multiple objectives. Our results indicate that the Chilean default policy has good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement.

Keywords

Closed-loop policiesdefined contributiondynamic programmingstochastic dominanceutility functions

JEL classification

H55: Social Security and Public Pensions D81: Criteria for Decision-Making under Risk and Uncertainty C61: Optimization Techniques • Programming Models • Dynamic Analysis
Type
Article
Information
Journal of Pension Economics & Finance , Volume 20 , Issue 2 , April 2021 , pp. 252 - 272
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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