Investment Regulations and Defined Contribution Pensions
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28 Iulie 2009 |
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Asociatia pentru Pensiile Administrate Privat din Romania (APAPR) |
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ABSTRACT
This paper assesses the impact of different quantitative approaches to regulate investment risk on the retirement income stemming from defined contribution (DC) pension plans. It looks at how such regulations affect the spectrum of investment policies available and, through this channel, how they affect the retirement income that an individual may expect from a DC pension plan.
The analysis shows that there is a trade-off between potential retirement income and protection from
bad outcomes. Reducing the downside risk on retirement income from DC pension plans requires moving
into relatively conservative investment policies where the share of assets allocated to bonds may be quite
large. However, this comes at the cost of renouncing potentially higher replacement rates that are attainable
but at a higher risk of unfavourable retirement income outcomes. Less risk adverse regulators and
supervisors would aim at lower probability requirements as regard the downside risk, which will increase
the range of investment policies available and thus the share of riskier assets.
JEL codes: D14, D91, E21, G11, G38, J14, J26
Key words: Investment, regulations, defined contribution pension plans, retirement income, replacement rates, risk management.
Copyright OECD, 2009
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