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Optimal Portfolios In Defined Contribution Pension Systems

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  • EDUARDO WALKER

    ()
    (Escuela de Administración, Pontificia Universidad Católica de Chile)

Abstract

We study optimal portfolios for defined contribution (possibly mandatory) pension systems, which maximize expected pensions subject to a risk level. By explicitly considering the present value of future individual contributions and changing the risk-return numeraire to future pension units we obtain interesting insights, consistent with the literature, in a simpler context. Results naturally imply that the local indexed (inflation-adjusted) currency is the benchmark and that the investment horizon is long. Optimal portfolios have a hedging component with an even longer duration than a deferred (real) pension, which begins its lifetime payments upon retirement. Results are illustrated with the parameters obtained for the United States by Campbell and Viceira (2001). It also discusses the implications for emerging market reformed pension systems.

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Bibliographic Info

Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 9 (2006)
Issue (Month): 2 ()
Pages: 99-129

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Handle: RePEc:pch:abante:v:9:y:2006:i:2:p:99-129

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Web page: http://eacc10.puc.cl/RePEc/pch/
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Related research

Keywords: Optimal portfolio; Defined contribution; Pension reform; Deferred pension; Emerging markets;

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References

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Cited by:
  1. Pablo Castañeda, 2007. "Long Term Risk Assessment in a Defined Contribution Pension System," Working Papers 20, Superintendencia de Pensiones, revised Oct 2007.

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