Department of Economics and Business Economics

The real risk in pension forecasting

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    Søren Kærgaard Slipsager
This paper sheds light on some of the flaws in the forecasting approach undertaken by the pension industry. Specifically, it considers the treatment of inflation and shows that the current modeling framework is too simplistic. I identify the flaws of the existing regulatory framework and provide an alternative full model framework constructed around the three-factor diffusion model recently proposed by the Danish Society of Actuaries. By use of a simulation study the deterministic inflation scheme applied in the industry is compared to a stochastic scheme and it is shown that the real value of the pension saver’s investment portfolio at retirement is highly dependent on the inflation scheme. As the deterministic scheme does not take state variable correlations into account it overestimates the expected portfolio value in real terms compared to the stochastic scheme. Moreover, the deterministic scheme gives rise to a more heavy-tailed distribution implying a misestimation of downside risk and upside potential. Finally, it is shown in a realistic case study that the pension saver’s expected retirement payout profile is heavily affected.
Original languageEnglish
JournalScandinavian Actuarial Journal
Volume2018
Issue number3
Pages (from-to)250-273
ISSN0346-1238
DOIs
Publication statusPublished - 2018

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