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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
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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

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