Rewarding Risk in Life-Cycle Investin

Abstract

Recently, the Dutch government and the social partners came to an agreement about a renewal of the Dutch pension system. The pension accrual of participants will be conditional and depend on the achieved returns. The accrual will also be age-dependent and pension funds are allowed to invest according the life-cycle principle, changing the level of risk for participants of different ages.

We derive the optimal allocation of assets according to the theory of life-cycle investing. We develop a stylized pension fund model along with a financial market model that invests the assets according to the life-cycle principle. We compare 4 different life-cycle strategies with a default strategy. No significant improvement for the pension accrual is found for the life-cycle strategies.