My interest in this area originated in the late 1990s when Andrew Cairns, David Blake and I built a
‘PensionMetrics’ model - a stochastic simulation model of a defined-contribution (DC) pension scheme. These are pension schemes in which the individual pension plan member bears all the
risks on their own, as opposed to defined-benefit (DB) schemes in which pension benefits are typically determined by years served and final salary.
We published the first (PensionMetrics model in 2001 (“PensionMetrics 1”) in 2001. This was a model of the accumulation phase (or pre-retirement phase) of a DC
pension plan, taking the plan member up to the point of retirement and assuming that the plan member simply converts his/her pension fund into an annuity at the point of retirement.
Other papers then followed:
“PensionMetrics 2” examined the alternative post-retirement strategies available to a DC
pension plan member.
“Stochastic lifestyling” examined alternative accumulation-phase investment
strategies, and proposed a new strategy (‘stochastic lifestyling’) which seems to deliver better results than than more traditional strategies.
“The impact of occupation and gender ...” looked at how DC accumulation-phase
pension outcomes were affected by occupation and gender differences, and finds that these can make a considerable difference.
Alistair Byrne then joined us and two further papers followed:
“There’s no time like the present” looked at the impact of delayed and interrupted pension
saving. The results make grim reading ...
“Default funds” examined the impact of the specification of default investment strategies in
stakeholder pension plans (a form of DC plan but for which public information is available) and our results suggest that these plans are basically a lottery - it all depends which company you
sign up with.
articles "Caveat Venditor" and "VfM" (joint with
David Blake and Debbie Harrison) look at the state of the DC market in the UK.
The methodology of DC modeling is set out in "Good Practice Principles in Modeling Defined Contribution Default Funds" published in March 2013.
More information on PensionMetrics can be found in our PensionMetrics website, www.penionmetrics.net.
A working demo can be found on the PensionMetrics website at www.pensionmetrics.net/online-demo.html.
Different versions of the PensionMetrics model have been presented at seminars at the BSI-Gamma Foundation, the OECD,
and at various major UK financial institutions. PM models have also been used in consultancy projects involving the Armenian Central Bank, ITN, the Money Advice Service, the World Bank and other
“Pensions Risk.” (K. Dowd and M. Woods) Financial Management, published by CIMA, Feb 2009, pp. 45-46.
Designing Defined-Contribution Pension Schemes.” (K. Dowd, D. Blake and A. J. G. Cairns.) Risk, Volume 18, No. 5 (May 2005), pp. 81-82.
“Measuring Annuity Risks.” Journal
of Accounting and Finance, Volume 2, 2003, pp. 99-107.
“Enhancing Annuities with Equity.” (D. Blake, A. J. G. Cairns and K. Dowd) Journal of Pensions Management: An International Journal, Vol. 7, No. 1, September
2001, pp. 6-8.