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The decumulation period of a personal pension with risk sharing: investment approach versus consumption approach

Published online by Cambridge University Press:  29 October 2018

Servaas van Bilsen  and
A. Lans Bovenberg
Servaas van Bilsen*
Affiliation:
Department of Quantitative Economics, University of Amsterdam and NETSPAR, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands
A. Lans Bovenberg
Affiliation:
Department of Economics, Tilburg University and NETSPAR, P.O. Box 90153, Tilburg, The Netherlands
*
*Corresponding author. E-mail: S.vanBilsen@uva.nl
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Abstract

This paper models the decumulation period of a Personal Pension with Risk sharing (PPR). We derive several relationships between the contract parameters. Individuals can adopt two approaches to the decumulation period of a PPR: the investment approach and the consumption approach. In the investment approach, individuals specify how to invest wealth and how much wealth to withdraw. Retirement consumption follows endogenously. In the consumption approach, in contrast, individuals specify retirement consumption exogenously. Investment and withdrawal policies follow endogenously. We explore these two approaches in detail. Consistent with habit formation, we allow for excess smoothness and excess sensitivity in retirement consumption.

Keywords

Consumption approachinvestment approachliability-driven investmentpersonal pension plansmoothing of shocks

JEL classification

G11: Portfolio Choice • Investment Decisions G13: Contingent Pricing • Futures Pricing J32: Nonwage Labor Costs and Benefits • Retirement Plans • Private Pensions D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 2 , April 2020 , pp. 262 - 291
Copyright
Copyright © Cambridge University Press 2018

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