The design of defined-contribution pension plans using a variable-contribution lifecycle programme

Abstract

Previous studies of portfolio allocation strategies over a finite time horizon have generally concluded that a constant proportion allocation is optimal. But it is common within the pensions industry to recommend a lifecycle strategy. To explain the optimality of the lifecycle approach, this paper examines the role of regular pension contributions. The analysis leads to the conclusion that variable contribution rates are important for lifecycle optimality; for a pension programme that contemplates fixed contributions, a constant proportion allocation is potentially as efficient. Essentially, lifecycle investment advice is incomplete without supplementary advice on variable contributions planning.