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Abstract
The transition from defined benefit to defined contribution (DC) pension schemes has raised concern about whether retirees will have adequate income for their retirement. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees. But far less attention is paid to portfolio insurance strategies, despite their suitability to pension funds and their optimality to certain investors. This thesis evaluates the performance of option-based and constant proportion portfolio insurance strategies. They are implemented to a DC fund that targets an inflation- and longevity-protected annuity at retirement. The results show that both strategies provide strong protection against downside risk.
In addition to occupational pension, housing is another important source of retirement savings. For young people entering the work force, home property purchase can significantly affect their savings for retirement. Literature on housing tenure choice largely focuses on determinants of home ownership, while its impact on retirement planning is rarely explored. This thesis investigates the question of when to become a homeowner from the perspective of financing retirement and conducts a welfare analysis. The presence of home equity can also affect individual demand for retirement products, such as annuities and long-term care insurance (LTCI). Despite high home ownership rates among retirees and significance of housing wealth in retired homeowners' portfolios, housing is often excluded from the literature of optimal consumption and portfolio choice. This thesis explains how homeowners' demand for annuities and LTCI differ from that of non-homeowners.
Individuals have heterogeneous levels of risk aversion and willingness to substitute consumption over time, as measured by elasticity of intertemporal substitution (EIS). LTCI insures against uncertain healthcare costs, so retirees of higher risk aversion will demand more coverage. Annuities smooth consumption over time while providing longevity insurance, so EIS is potentially the chief determinant of optimal annuitisation rate. Existing research exploring demand for retirement products mostly uses a power utility function that imposes risk aversion is the reciprocal of EIS, reflecting preference of only a small group of retirees. This thesis extends the literature by separating these two factors and showing their different impact on demand for annuities and LTCI.