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51. Default strategy in pension saving: The case of Slovakia

This paper analyses saving habits of participants in the Slovakia’s private pension scheme and discusses optimal default investment strategies. A typical participant in Slovakia’s private pension saving scheme invests mainly in conservative assets that deliver low volatility of returns in the short-run, which might not necessarily be optimal from a long-run perspective. Using resampling simulations based on historical asset returns, we find that an optimal default lifecycling strategy consists of initially investing entirely into equities for first half of individual’s career, and later switching new contributions to bonds. Not only new, but also current participants could benefit from switching to default saving strategy. After reaching the retirement age, pensioners should choose a programmed withdrawal of their savings, leaving most of them to accumulate further while decreasing the allocation to stocks. To incentivize the participation in default strategies, we introduce guarantees whose goal is to protect investors from extremely adverse outcomes.