We study the optimal management of a collectivised pension fund, where all investors agree that the assets of deceased members are shared among the survivors. We find that for realistic parameters based on the UK pensions market, a collectivised fund achieves an approximately 20 \% better return than either an annuity or a personal investment fund . We introduce models of investor preferences over a stream of pension payments in the presence of mortality, incorporating a new concept of adequacy. We find that for risk-averse individuals, pension adequacy plays an important role in determining the optimal fund management strategy. A key issue in the design of collective funds is how to ensure the fund treats all investors fairly. This is a trivial problem in the case that all investors have identical preferences, wealth and mortality, but becomes challenging for heterogeneous funds. We give a strategy for the management of heterogeneous funds in complete markets and prove that it is asymptotically optimal in the absence of systematic longevity risk. \\%DIF > more initial capital to provide as good an outcome as a collectivised investment fund. We demonstrate the importance of the new concept of pension adequacy in defining investor preferences and determining optimal fund management. We show how to manage heterogeneous funds of investors with diverse needs. Our framework can be applied to existing pension products, such as Collective Defined Contribution schemes.
We quantify the benefit of collectivised investment funds, in which the assets of members who die are shared among the survivors. For our model, with realistic parameter choices, an annuity or individual fund requires approximately 20 \\%DIF > more initial capital to provide as good an outcome as a collectivised investment fund. We demonstrate the importance of the new concept of pension adequacy in defining investor preferences and determining optimal fund management. We show how to manage heterogeneous funds of investors with diverse needs. Our framework can be applied to existing pension products, such as Collective Defined Contribution schemes.
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study the optimal management of a collectivised pension fund, where all investors agree that
quantify the benefit of collectivised investment funds, in which
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deceased members
members who die
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We find that for realistic parameters based on the UK pensions market, a collectivised fund achieves an approximately
For our model, with realistic parameter choices, an annuity or individual fund requires approximately
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\% better return than either an annuity or a personal investment fund . We introduce models of investor preferences over a stream of pension payments in the presence of mortality, incorporating a new concept of adequacy. We find that for risk-averse individuals, pension adequacy plays an important role in determining the optimal fund management strategy. A key issue in the design of collective funds is how to ensure the fund treats all investors fairly. This is a trivial problem in the case that all investors have identical preferences, wealth and mortality, but becomes challenging for heterogeneous funds. We give a strategy for the management of heterogeneous funds in complete markets and prove that it is asymptotically optimal in the absence of systematic longevity risk.