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A dynamic life cycle analysis for a Defined Contribution pension plan

Knol, E.J. (2019) A dynamic life cycle analysis for a Defined Contribution pension plan.

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Abstract:The current Defined Benefit pension system is under review and the market shifts towards a Defined Contribution pension plan, with more emphasis on individualisation. This shift increases the importance of life cycle investing. A life cycle investment strategy attempts to determine the most appropriate asset mix for Defined Contribution pension plan participants to balance their risk and return profiles based on the number of years the participants have until retirement. We have found no substantiation for the fact that the current life cycle performs well under the current economic conditions and leads to an optimal pension benefit. We contribute to the literature because we compare existing life cycles with optimised linear and dynamic life cycles in the Dutch pension context. The dynamic life cycle used in our research is non-linear and dependent on market conditions. We build a simulation model, which consists of a dynamic Nelson-Siegel and a vector autoregression (VAR) model with a Markov regime switching component, to incorporate stochastic interest rates and equity returns. In this way we can evaluate different life cycle designs under different economic conditions.
Item Type:Essay (Master)
MN, Den Haag, Nederland
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:01 general works, 50 technical science in general, 83 economics
Programme:Industrial Engineering and Management MSc (60029)
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