An Approach to Resolving the Retirement Trilemma

Recently, legislation has been enacted in Australia that requires trustees of superannuation (pension) funds to assist members who are retired or who are approaching retirement and balance the following objectives:

• Maximise expected retirement income over the period of retirement
• Manage expected risks to the sustainability and stability of retirement income over the period of retirement
• Have flexible access to expected funds over the period of retirement.

The attempts to balance these three often competing objectives is sometimes referred to as the retirement trilemma. The paper investigates a particular approach to resolving the trilemma. The essence of the approach is to actuarially determine drawdowns each year, based on the then balance at the start of the year and on a pre-determined funding period. The methodology is a very simple example of the actuarial control cycle. The premise of the methodology is that the retiree is satisfied the calculated drawdown is the best estimate to last for the funding period. The method of achieving the objective of maximising income is through asset allocation and the method of achieving flexible access is through product design. The sustainability objective is achieved with-in a frame-work of probability of survival and healthy life expectancy.
Benchmarks for measuring stability of income are proposed. Various scenarios with-in the framework of the approach are tested by determining the out workings of the approach by using actual rates of return of typical fund investments in the period 1959 to 2021.
 
Find the Q&A here: Q&A on 'Pension Issues in a Changing World'