Personal Pension Plans and Stock Market Volatility
One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on r...
| Main Authors: | , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://hdl.handle.net/10986/19970 |
| id |
okr-10986-19970 |
|---|---|
| recordtype |
oai_dc |
| spelling |
okr-10986-199702021-04-23T14:03:52Z Personal Pension Plans and Stock Market Volatility Alier, Max Vittas, Dimitri accumulation period annuity annuity markets annuity rate asset prices Balanced Funds bond markets bonds capital markets Consumer Price Index contribution rate debt deferred annuities defined benefit plans derivatives discount rate earnings growth equity returns financial assets financial crises financial markets financial policies financial systems fixed annuities future payments government bonds government regulations growth rate individual accounts individual retirement accounts inefficiency inflation inflation risk insurance companies insurance company interest rates investment returns investment risk legislation life expectancies life expectancy longevity insurance minimum period moral hazard National Income net returns normal retirement age passive investment pension fund pension fund investments pension fund management pension fund managers pension funds pension plan pension reform pension system pension systems pensioners pensions Personal pension plans Portfolio private pension private pension funds profitability provident funds public pillar replacement rate replacement rates retirement retirement age retirement benefits retirement income Retirement Income Security risk-free rate Savings social security social security systems Stocks tax treatment Thrift Savings Plan variable annuities wages One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: a) portfolio diversification; b) a late, gradual shift to bonds; c) a gradual purchase of nominal or real annuities; d) a purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacement rates across generations without lowering their level - because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither authors' approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors' findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted. 2014-09-04T22:08:33Z 2014-09-04T22:08:33Z 2000-10 http://hdl.handle.net/10986/19970 en_US Policy Research Working Paper;No. 2463 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank, Washington, DC Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
en_US |
| topic |
accumulation period annuity annuity markets annuity rate asset prices Balanced Funds bond markets bonds capital markets Consumer Price Index contribution rate debt deferred annuities defined benefit plans derivatives discount rate earnings growth equity returns financial assets financial crises financial markets financial policies financial systems fixed annuities future payments government bonds government regulations growth rate individual accounts individual retirement accounts inefficiency inflation inflation risk insurance companies insurance company interest rates investment returns investment risk legislation life expectancies life expectancy longevity insurance minimum period moral hazard National Income net returns normal retirement age passive investment pension fund pension fund investments pension fund management pension fund managers pension funds pension plan pension reform pension system pension systems pensioners pensions Personal pension plans Portfolio private pension private pension funds profitability provident funds public pillar replacement rate replacement rates retirement retirement age retirement benefits retirement income Retirement Income Security risk-free rate Savings social security social security systems Stocks tax treatment Thrift Savings Plan variable annuities wages |
| spellingShingle |
accumulation period annuity annuity markets annuity rate asset prices Balanced Funds bond markets bonds capital markets Consumer Price Index contribution rate debt deferred annuities defined benefit plans derivatives discount rate earnings growth equity returns financial assets financial crises financial markets financial policies financial systems fixed annuities future payments government bonds government regulations growth rate individual accounts individual retirement accounts inefficiency inflation inflation risk insurance companies insurance company interest rates investment returns investment risk legislation life expectancies life expectancy longevity insurance minimum period moral hazard National Income net returns normal retirement age passive investment pension fund pension fund investments pension fund management pension fund managers pension funds pension plan pension reform pension system pension systems pensioners pensions Personal pension plans Portfolio private pension private pension funds profitability provident funds public pillar replacement rate replacement rates retirement retirement age retirement benefits retirement income Retirement Income Security risk-free rate Savings social security social security systems Stocks tax treatment Thrift Savings Plan variable annuities wages Alier, Max Vittas, Dimitri Personal Pension Plans and Stock Market Volatility |
| relation |
Policy Research Working Paper;No. 2463 |
| description |
One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: a) portfolio diversification; b) a late, gradual shift to bonds; c) a gradual purchase of nominal or real annuities; d) a purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacement rates across generations without lowering their level - because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither authors' approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors' findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Alier, Max Vittas, Dimitri |
| author_facet |
Alier, Max Vittas, Dimitri |
| author_sort |
Alier, Max |
| title |
Personal Pension Plans and Stock Market Volatility |
| title_short |
Personal Pension Plans and Stock Market Volatility |
| title_full |
Personal Pension Plans and Stock Market Volatility |
| title_fullStr |
Personal Pension Plans and Stock Market Volatility |
| title_full_unstemmed |
Personal Pension Plans and Stock Market Volatility |
| title_sort |
personal pension plans and stock market volatility |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://hdl.handle.net/10986/19970 |
| _version_ |
1764444195657875456 |