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Income Drawdown Schemes for a Defined‐Contribution Pension Plan

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  • Paul Emms
  • Steven Haberman

Abstract

In retirement a pensioner must often decide how much money to withdraw from a pension fund, how to invest the remaining funds, and whether to purchase an annuity. These decisions are addressed here by introducing a number of income drawdown schemes, which are relevant to a defined‐contribution personal pension plan. The optimal asset allocation is defined so that it minimizes the expected loss of the pensioner as measured by the performance of the pension fund against a benchmark. Two benchmarks are considered: a risk‐free investment and the price of an annuity. The fair‐value income drawdown rate is defined so that the fund performance is a martingale under the objective measure. Annuitization is recommended if the expected fair‐value drawdown rate falls below the annuity rate available at retirement. As an illustration, the annuitization age is calculated for a Gompertz mortality distribution function and a power law loss function.

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  • Paul Emms & Steven Haberman, 2008. "Income Drawdown Schemes for a Defined‐Contribution Pension Plan," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(3), pages 739-761, September.
    • Handle: RePEc:bla:jrinsu:v:75:y:2008:i:3:p:739-761
    DOI: 10.1111/j.1539-6975.2008.00282.x
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    Cited by:

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    2. Han, Nan-Wei & Hung, Mao-Wei, 2015. "The investment management for a downside-protected equity-linked annuity under interest rate risk," Finance Research Letters, Elsevier, vol. 13(C), pages 113-124.
    3. Mauricio Arias & Juan Carlos Mendoza, 2009. "Un modelo de simulación del Régimen Pensional de Ahorro Individual con Solidaridad en Colombia," Temas de Estabilidad Financiera 044, Banco de la Republica de Colombia.
    4. Iqbal Owadally & Steven Haberman & Denise Gómez Hernández, 2013. "A Savings Plan With Targeted Contributions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(4), pages 975-1000, December.
    5. Hainaut, Donatien & Deelstra, Griselda, 2014. "Optimal timing for annuitization, based on jump diffusion fund and stochastic mortality," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 124-146.
    6. Ayşegül İşcanog̃lu-Çekiç, 2016. "An Optimal Turkish Private Pension Plan with a Guarantee Feature," Risks, MDPI, vol. 4(3), pages 1-12, June.
    7. Hong‐Chih Huang, 2010. "Optimal Multiperiod Asset Allocation: Matching Assets to Liabilities in a Discrete Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 451-472, June.
    8. Nancy Quinceno Cárdenas, 2014. "Modelación basada en agentes en el sistema pensional colombiano. Una aproximación desde el mercado laboral y la dinámica poblacional," Revista CIFE, Universidad Santo Tomás, September.

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