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DISCUSSION PAPER PI-0103

Pensionmetrics 2: Stochastic Pension Plan Design
During the Distribution Phase

David Blake, Andrew Cairns, and Kevin Dowd

ABSTRACT

We consider the choices available to a defined contribution (DC)
pension plan member at the time of retirement for conversion of his
pension fund into a stream of retirement income. In particular, we
compare the purchase at retirement age of a conventional life annuity
(i.e., a bond-based investment) with distribution programmes involving
differing exposures to equities during retirement. The residual fund at
the time of the plan member's death can either be bequested to his
estate or revert to the life office in exchange for the payment of survival
credits while alive. The most important decision, in terms of cost to the
plan member, is the level of equity investment. We also find that the optimal
age to annuitise depends on the bequest utility and the investment performance
of the fund during retirement.

Keywords: Stochastic pension plan design; defined contribution; discounted
utility; life annuity; income drawdown; asset allocation; optimal annuitisation age.