 The real risk in pension forecastingSøren Kærgaard Slipsager Scandinavian Actuarial Journal, 2018, vol. 2018, issue 3, 250-273 Abstract: The purpose of this paper is to shed 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 I compare the deterministic inflation scheme applied in the industry to a stochastic scheme and show 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. Date: 2018 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2018:y:2018:i:3:p:250-273 Ordering information: This journal article can be ordered from DOI: 10.1080/03461238.2017.1341847 Access Statistics for this article Scandinavian Actuarial Journal is currently edited by Boualem Djehiche More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals |
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