IMPACT OF DIFFERENT LIFE-CYCLE SAVING STRATEGIES AND UNEMPLOYMENT ON INDIVIDUAL SAVINGS IN DEFINED CONTRIBUTION PENSION SCHEME IN SLOVAKIA


Finance

IMPACT OF DIFFERENT LIFE-CYCLE SAVING STRATEGIES AND UNEMPLOYMENT ON INDIVIDUAL SAVINGS IN DEFINED CONTRIBUTION PENSION SCHEME IN SLOVAKIA

Individuals in mandatory pension saving (MPS) scheme in Slovakia have their savings allocated mostly in one of the pension funds – equity or bond funds. Saving in only one of these funds will be considered as benchmark strategies. In our article, our goal is to compare the profitability that can be achieved with benchmark strategies compared to life-cycle savings strategies. In their case, the ratio of savings between equity and bond components changes dynamically, depending on the age and remaining savings period of 40 years (480 months). We deal with 3 types of individuals with different education level. In addition to comparing the potentially achievable returns at the end of the saving horizon, we will also be interested in the volatility of achievable returns and their spread from the average with the selected savings strategies. Savers are trying to get the best value for money, but they should also take into account the fact that higher potential appreciation also entails higher risk.
Jméno a příjmení autora:

Michal Mešťan, Ivan Králik, Leoš Šafár, Ján Šebo

Rok:
2021
Ročník:
24
Číslo:
3
Klíčová slova:
Pension savings, unemployment life-cycle income, life-cycle stratégy
DOI (& full text):
Anotace:
Searching for the optimal saving strategy is often tied with the life-cycle strategies where only the age of a saver is considered for setting the allocation profile between equities and bonds. Our…více
Searching for the optimal saving strategy is often tied with the life-cycle strategies where only the age of a saver is considered for setting the allocation profile between equities and bonds. Our article contributes to the debate by looking at the performance and adequacy risks arising from applying age-based saving strategies for savers in funded pension schemes. As many studies have proven the shift of the risk onto savers in defined contribution pension schemes under various saving strategies, we contribute to the debate by providing simulations of expected accumulated savings via funded pension scheme under the various life-cycle income profiles and existence of unemployment risk. Using the resampling simulation technique, we compare the fixed and age-based strategies of three different agents with various life-cycle income paths and different unemployment risk. We compare the expected amount of savings and calculate relative indicators comparing the expected monthly benefits, income replacement rate. We look closely on the impact of unemployment on the value of savings and calculate the unemployment factor explaining the value of savings lost due to the periods of unemployment. By combining life-cycle income functions of individuals with different education level and unemployment risk, we show that decisions of implementing low risk saving strategies are suboptimal and lead to a substantial decrease in replacement ratios not only for higher income cohorts but especially for the lowest ones. At the same time, we prove that employing low risk saving strategy leads to the increase of adequacy risk especially driven by the unemployment risk that is higher for lower education individuals. We conclude that age-based life-cycle saving strategies, where the remaining saving horizon is the only factor defining the allocation profile is not the optimal saving strategy and other factors should be considered as well when searching for optimal saving strategy.
Sekce:
Finance

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