Risk reduction in two-pillar mandatory pension system under regulatory constraints: simulation-based evidence from Poland

ABSTRACT

The regulatory framework of the Polish pension system is far-removed from the optimal lifecycle portfolio approach, which recommends a time-varying asset mix to minimize portfolio risk. Nevertheless, a question emerges on how large diversification gains can grow under the existing rules. This study accounts for the current restrictions and estimates risk-reduction opportunities under the two-pillar pension system. We compare the outcomes with our previous results for optimal portfolio allocation and, as in the previous study, use a Monte Carlo approach with a copula function to simulate the distribution of replacement rates for the Polish pension system. We conclude that the regulations hinder, to a significant extent, the opportunity to minimize shortfall risks, an unsatisfactory outcome for Polish pensioners.

KEYWORDS:

• Pension system
• pay-as-you-go
• lifecycle portfolio
• shortfall risk
• funded pillar

JEL CLASSIFICATION:

• C53
• G11
• H55

Disclosure statement

The authors report no potential conflict of interest.

Data availability statement

The data that support the findings of this study are openly available in Harvard Dataverse at https://doi.org/10.7910/DVN/AB5XYQ, UNF:6:KwP0Ac2vazeqj6jkfpiM6w== [fileUNF].

Notes

¹ Note that this is the true value of pension contribution.

Additional information

Funding

This work was supported by the National Science Centre (Poland) under [Grant DEC-2013/11/D/HS4/03840].