Risk Management Issues for Mandatory Private Retirement Provision: Roles for Options

Abstract

Following the introduction of mandatory superannuation provision in Australia, superannuation fund managers and trustees are faced with the conflicting objectives of high returns and minimal year-on-year volatility. This paper investigates whether repeat portfolio insurance implemented over the working life time of superannuation saving can offer a solution. Stochastic simulations show that the options-based strategies perform well in comparison to traditional investment practices. Strategies combining protective puts with age phasing produce the most appealing results.

Down the Retirement Risk Zone with Gun and Camera

“…Bateman () casts doubt on collars as suitable derivatives for managing market risk in defined‐contributions plans. She shows that the equivalent position in the two underlying assets (i.e., shares and cash) typically turns out to be surprisingly conservative.…”

“…Combining puts and calls in a retirement collar allows you to sell a call with a high strike price and, in turn, use the proceeds to purchase a put with a higher strike price. (p. 21, emphasis as in the original) Bateman (1997) casts doubt on collars as suitable derivatives for managing market risk in definedcontributions plans. She shows that the equivalent position in the two underlying assets (i.e., shares and cash) typically turns out to be surprisingly conservative.…”

Retirement provision: accumulations, security, and insurance

“…Bateman (1998) discusses the use of portfolio insurance techniques, such as protective puts and collars, to protect DC accumulations. Bodie & Crane (1999) discuss the use of call option strategies pioneered by Merton, Scholes & Gladstein (1978).…”