Risk analysis of the proxy life-cycle investments in the second pillar pension scheme in Croatia
Renata Kovačević, Raiffeisen Mandatory and Voluntary Pension Funds Management Company Plc, Zagreb, Croatia
Mladen Latković, Raiffeisen Mandatory and Voluntary Pension Funds Management Company Plc, Zagreb, Croatia
In this article we analyze the expected risk of pension funds with different risk profiles in the proxy life-cycle model of investments for the 2nd pillar pension scheme in Croatia. The benefits of implementing proxy life-cycle investments, compared to the previous model of mandatory pension funds investments, are clearly visible in the total expected amount of accumulated savings from the risk/return perspective. However, those benefits are partially diminished by the fact that the expected risk of a pension fund with the lowest risk profile is not substantially different from the expected risk of a pension fund with a medium risk profile, due to the lack of diversification. Additionally, we analyze the robustness of the proxy life-cycle model to a sudden and severe market shock, where we determine the presence of risk for those members who choose to switch to a pension fund with a lower risk profile at an unfavorable moment.
Keywords: defined contribution system; pension funds; life-cycle investing; portfolio risk
Year: 2015 | Volume: 39 | Issue: 1 | Pages: 31 - 55
Full text (PDF) | DOI: 10.3326/fintp.39.1.2 | E-mail this article | Download to citation manager
I / 2015