Maurer, Raimond
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Publication Understanding and Allocating Investment Risks in a Hybrid Pension Plan(2005-01-01) Albrecht, Peter; Coche, Joachim; Maurer, Raimond; Rogalla, RalphThis paper analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans which are optimal either from the perspective of the plan sponsor or the beneficiaries.The focus is in particular on how the introduction of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on the return of the members’ individual investment accounts affect investment decisions and plan costs. Within a comparative static analysis framework, it is shown that for low to medium risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees while for the latter costs increase exponentially with investment risk. The study also finds that portfolio choices of the sponsor and the beneficiaries show substantial differences depending on the exact plan design and the beneficiaries’ risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries, and to keep pension plan costs under control.Publication The Effect of Uncertain Labor Income and Social Security on Life-cycle Portfolios(2009-09-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphThis paper examines how labor income volatility and social security benefits influence life-cycle household portfolios. We examine how much the individual saves, and where, taking into account liquid financial wealth and annuities, and stocks versus bonds. Higher labor income uncertainty and lower old-age benefits boost demand for stable income in retirement, but also when young. In addition, a declining equity glide path with age is appropriate for the worker with low income uncertainty but for the high income risk worker, equity exposure rises until retirement. We also evaluate how changes in social security benefits influence retirement risk management.Publication Money-Back Guarantees in Individual Pension Accounts: Evidence from the German Pension Reform(2002-01-01) Maurer, Raimond; Schlag, ChristianThe German Retirement Saving Act instituted a new funded system of supplementary pensions coupled with a general reduction in the level of state pay-as-you-go old-age pensions. In order to qualify for tax relief, the providers of supplementary savings products must offer a guarantee of the nominal value at retirement of contributions paid into these saving accounts. This paper explores how this “money-back” guarantee works and evaluates alternative designs for guarantee structures, including a life cycle model (dynamic asset allocation), a plan with a pre-specified blend of equity and bond investments (static asset allocation), and some type of portfolio insurance. We use a simulation methodology to compare hedging effectiveness and hedging costs associated with the provision of the moneyback guarantee. In addition, the guarantee has important implications for regulators who must find an appropriate solvency system for such saving schemes.Publication Optimal Life-Cycle Strategies in the Presence of Interest Rate and Inflation Risk(2007-10-01) Maurer, Raimond H; Schlag, Christian; Stamos, Michael ZDefined Contribution PlansPublication Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts(2008-05-01) Horneff, Wolfram J; Maurer, Raimond H; Mitchell, Olivia S; Stamos, Michael ZThis paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We confirm that the investor will gradually move money out of her liquid saving into survivalcontingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.Publication Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion(2006-07-01) Horneff, Wolfram J; Maurer, Raimond; Mitchell, Olivia S; Dus, IvicaRetirees must draw down their accumulated assets in an orderly fashion so as not to exhaust their funds too soon. We derive the optimal retirement portfolio from a menu that includes payout annuities as well as an investment allocation and a withdrawal strategy, assuming risk aversion, stochastic capital markets, and uncertain lifetimes. The resulting portfolio allocation, when fixed as of retirement, is then compared to phased withdrawal strategies such a “self-annuitization” plan or the 401(k) “default” pattern encouraged under US tax law. Surprisingly, the fixed percentage approach proves appealing for retirees across a wide range of risk preferences, supporting financial planning advisors who often recommend this rule. We then permit the retiree to switch to an annuity later, which gives her the chance to invest in the capital market and “bet on death.” As risk aversion rises, annuities first crowd out bonds in retiree portfolios; at higher risk aversion still, annuities replace equities in the portfolio. Making annuitization compulsory can also lead to substantial utility losses for less risk-averse investors.Publication Managing Contribution and Capital Market Risk in a Funded Public Defined Benefit Plan: Impact of CVaR Cost Constraints(2008-09-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphUsing a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension manager’s objective of controlling contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public pension system can be beneficial for both civil servants and taxpayers.Publication Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities versus Phased Withdrawal Plans(2004-01-01) Dus, Ivica; Maurer, Raimond; Mitchell, Olivia SHow might retirees consider deploying the retirement assets accumulated in a defined contribution pension plan? One possibility would be to purchase an immediate annuity. Another approach, called the “phased withdrawal” strategy in the literature, would have the retiree invest his funds and then withdraw some portion of the account annually. Using this second tactic, the withdrawal rate might be determined according to a fixed benefit level payable until the retiree dies or the funds run out, or it could be set using a variable formula, where the retiree withdraws funds according to a rule linked to life expectancy. Using a range of data consistent with the German experience, we evaluate several alternative designs for phased withdrawal strategies, allowing for endogenous asset allocation patterns, and also allowing the worker to make decisions both about when to retire and when to switch to an annuity. We show that one particular phased withdrawal rule is appealing since it offers relatively low expected shortfall risk, good expected payouts for the retiree during his life, and some bequest potential for the heirs. We also find that unisex mortality tables if used for annuity pricing can make women’s expected shortfalls higher, expected benefits higher, and bequests lower under a phased withdrawal program. Finally, we show that delayed annuitization can be appealing since it provides higher expected benefits with lower expected shortfalls, at the cost of somewhat lower anticipated bequests.Publication Reforming the German Civil Servant Pension Plan(2008-07-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphWe analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for civil servants in Germany, allowing for alternative portfolio mixes using a Monte Carlo framework and a Conditional Value at Risk metric. First, we estimate contributions as a percent of salary that would fully fund future benefit promises for active employees. Second, we identify an investment strategy for plan assets that will minimize worst-case pension costs; this turns out to be 22% in equities, 47% in bonds, and 30% in real estate. Third, we explore the time path of pension fund asset shortfalls and the chances of contribution holidays for current and future generations. We show that moving toward a funded pension system for German civil servants can be beneficial to both taxpayers and civil servants.Publication Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts(2009-05-01) Chai, Jingjing; Horneff, Wolfram J; Maurer, Raimond; Mitchell, Olivia SThis paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survivalcontingent payout annuities. We show that making labor supply endogenous raises older peoples’ equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, if we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.