Asset Allocation in Defined-contribution Schemes: An Analysis of Deterministic Defined-contribution Profiles

Linn Elise St√łttum Stenseth & Christina Hagen

Student thesis: Master thesis

Abstract

The thesis investigates the Norwegian pension market, where it analyzes asset allocations in various defined-contribution schemes. By comparing different contribution profiles from academic literature and firms in the market, the thesis finds the optimal contribution profiles for different investors from three different income groups. It is built a model that considers one risky asset and one less risky asset. The model estimates the expected utility of the total pension holding for an average investor of these groups. Equity returns and bond returns are modeled with a Geometric Brownian motion with constant parameters of volatility and risk-premium. The results indicate that several of the present investment strategies in the market are suboptimal for Norwegian pension savers and that the contribution profiles with high equity exposure are the most optimal. Since folketrygden considers as a risk-free asset, investors are more risk-willing towards high equity exposure of the contribution pension. Contribution profiles with gradual adjustments are though deemed optimal to more risk averse and high-income investors.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages174
SupervisorsHenrik Ramlau-Hansen