Using stochastic modelling, we demonstrate that the best investment strategy for the accumulation phase of a defined contribution pension plan is one that limits the range of returns that are credited to the plan member’s account. In particular, we show that with profit accumulation programmes which make use of a smoothing fund to smooth out returns over time dominate unit-linked accumulation programmes. However, for the decumulation phase, we show that it is hard in practice for an investment-linked decumulation programme to beat the income and security provided by a standard annuity, although we again find that with-profit decumulation programmes dominate unit-linked decumulation programmes. Return smoothing is therefore a valuable feature of any long term investment programme both during the accumulation and decumulation phases and this has important implications for the design of Sandler ‘stakeholder’ products.
Also in UBS Pensions Series 010
