Investment Choice in Collectivised Pensions
By John Armstrong & Cristin Buescu
Investment choice is a central theme of UK pension policy. This paper shows how a collective pension fund can be managed in a manner that allows individuals to choose how their pension is invested and their schedule of pension payments. The potential benefit to investors of such a fund is quantified on the assumption that they choose to invest optimally. For our indicative choice of individual we find that they would need to invest approximately 20\% more in classical pension products such as annuities, DB funds or DC funds in order to achieve the same level of welfare as they can in a collective fund with investment choice. We consider how large such a fund would need to be in order to be effective and find that they can be practical even with a modest number of participants. We consider how one might allow for inter-generational risk-sharing in a collective fund with investment choice without the pitfalls experienced in centrally planned funds where
membership is compulsory.
Source: SSRN
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