Risk analysis of the proxy life-cycle investments in the second pillar pension scheme in Croatia

In this article we analyze the expected risk of pension funds with different risk profiles in the proxy life-cycle model of investments for the 2nd pillar pension scheme in Croatia. The benefits of implementing proxy life-cycle investments, compared to the previous model of mandatory pension funds i...

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Bibliographic Details
Published in:Financial theory and practice 2015-03, Vol.39 (1), p.31-55
Main Authors: Kovacevic, enata, Latkovic, Mladen
Format: Article
Language:English
Subjects:
Croatia
defined contribution system
defined contribution system
pension funds
life-cycle investing
portfolio risk
Financial risks
Investment analysis
Life cycles
life-cycle investing
Pension funds
Pension schemes
portfolio risk
Risk management
Savings
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Summary:In this article we analyze the expected risk of pension funds with different risk profiles in the proxy life-cycle model of investments for the 2nd pillar pension scheme in Croatia. The benefits of implementing proxy life-cycle investments, compared to the previous model of mandatory pension funds investments, are clearly visible in the total expected amount of accumulated savings from the risk/return perspective. However, those benefits are partially diminished by the fact that the expected risk of a pension fund with the lowest risk profile is not substantially different from the expected risk of a pension fund with a medium risk profile, due to the lack of diversification. Additionally, we analyze the robustness of the proxy life-cycle model to a sudden and severe market shock, where we determine the presence of risk for those members who choose to switch to a pension fund with a lower risk profile at an unfavorable moment.
ISSN:1846-887X
1845-9757
1845-9757
DOI:10.3326/fintp.39.1.2