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

Published online by Cambridge University Press:  01 October 2008

RENXIANG DAI  and
J.M. SCHUMACHER
RENXIANG DAI*
Affiliation:
Netspar, CentER, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands
J.M. SCHUMACHER*
Affiliation:
Netspar, CentER, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands
*
e-mail: r.dai@uvt.nl
j.m.schumacher@uvt.nl
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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.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 3 , July 2009 , pp. 321 - 350
Copyright
Copyright © 2008 Cambridge University Press

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Footnotes

*

Previous versions of the paper were presented at the ‘Insurance: Mathematics and Economics’ conference held in Piraeus, Greece, and the Netspar Pension Days in Tilburg, The Netherlands. We thank Lans Bovenberg, An Chen, Frank de Jong, Joost Driessen, Bertrand Melenberg, Theo Nijman, Michael Orszag (the Coordinating Editor) and two anonymous reviewers for helpful comments.

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