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Assessing the Labour, Financial and Demographic Risks to Retirement Income from Defined-Contribution Pensions

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  • Pablo Antolin
  • Stéphanie Payet

Abstract

This article examines the impact of labour, financial and demographic risks on retirement income from DC pension plans, with a special emphasis on labour-market risk. It uses a stochastic model that incorporates uncertainty about returns on investment, inflation, discount rates, life expectancy, employment prospects and real wages. The analysis herein highlights that labour-market risk, as well as uncertainty about returns on investment and inflation, have the largest impact on retirement income. The results suggest that default life-cycle investment strategies that reduce exposure to risky assets in the last decade before retirement are quite helpful in reducing the risk of sharp reductions in retirement income, in particular when a negative shock to equity markets occurs in the years before retiring. However, life-cycle strategies fail to address issues of retirement income adequacy or smooth out the volatility in retirement income from DC pension plans.

Suggested Citation

  • Pablo Antolin & Stéphanie Payet, 2011. "Assessing the Labour, Financial and Demographic Risks to Retirement Income from Defined-Contribution Pensions," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(2), pages 189-217.
  • Handle: RePEc:oec:dafkad:5kggc0z23fr5
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    File URL: http://dx.doi.org/10.1787/fmt-2010-5kggc0z23fr5
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    References listed on IDEAS

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    1. Oecd, 2008. "The recent financial market turmoil, contagion risks and policy responses," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 9-28.
    2. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199.
    3. Chen, Carl R. & Steiner, Thomas L. & Whyte, Ann Marie, 2006. "Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 915-945, March.
    4. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
    5. Adrian Blundell-Wignall, 2007. "Structured Products: Implications for Financial Markets," Financial Market Trends, OECD Publishing, vol. 2007(2), pages 27-57.
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