Welfare analysis of conditional indexation schemes from a two-reference-point perspective

R. Dai, J.M. Schumacher

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Conditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.
Original languageEnglish
Pages (from-to)321-350
JournalJournal of Pension Economics and Finance
Volume8
Issue number3
Publication statusPublished - 2009

Fingerprint

Reference point
Welfare analysis
Indexation
Benchmark
Self-financing
Defined contribution
Policy mix
Utility function
Investment strategy
Pension funds
Life cycle
Contingent claims
Continuous time
Defined benefit
Alternative investments

Cite this

@article{198eb5aca51b46f0ac27c55ee9133f35,
title = "Welfare analysis of conditional indexation schemes from a two-reference-point perspective",
abstract = "Conditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.",
author = "R. Dai and J.M. Schumacher",
year = "2009",
language = "English",
volume = "8",
pages = "321--350",
journal = "Journal of Pension Economics and Finance",
issn = "1474-7472",
publisher = "CAMBRIDGE UNIV PRESS",
number = "3",

}

Welfare analysis of conditional indexation schemes from a two-reference-point perspective. / Dai, R.; Schumacher, J.M.

In: Journal of Pension Economics and Finance, Vol. 8, No. 3, 2009, p. 321-350.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Welfare analysis of conditional indexation schemes from a two-reference-point perspective

AU - Dai, R.

AU - Schumacher, J.M.

PY - 2009

Y1 - 2009

N2 - Conditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.

AB - Conditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.

M3 - Article

VL - 8

SP - 321

EP - 350

JO - Journal of Pension Economics and Finance

JF - Journal of Pension Economics and Finance

SN - 1474-7472

IS - 3

ER -