printer-friendly version

A major crisis is threatening the sustainability of pension systems across the globe and the investment industry is facing an ever-greater responsibility to provide suitable retirement solutions.

EDHEC-Risk Institute runs a strategic research programme on retirement solutions. The available investment products distributed by asset managers or insurance companies hardly provide a satisfying answer to the needs of investors and households in retirement, and academia can provide new insights into how best to design improved retirement solutions with a focus on replacement income.

In particular the principles of goal-based investing can be applied to the design of a new generation of goal-based retirement investing strategies, which can be regarded as risk-controlled target date funds that strike a balance between security and performance with respect to the objective of generating replacement income.

In Video : The Pensions Crisis and Flexicure Investment Solutions

 

The Pensions Crisis & Flexicure Retirement solutions
Demographic Imbalances
The Landscape: retirement products
Insurance Products
Investment Products
The Solution: Flexicure retirement Sol:utions
Retirement bonds
Fixed income securities
deferred annuity
Replacement income
improve target date funds
retirement bond
Improved TDF
TDF 2.0

 

In Illustration (GIF) : The Pensions Crisis and Flexicure Investment Solutions

 

 

 

Main Publications 

Securing Replacement Income with Goal-Based Retirement Investing Strategies
“Flexicure” Retirement Solutions: A Part of the Answer to the Pension Crisis?

Advances in Retirement Investing


Securing Replacement Income with Goal-Based Retirement Investing Strategies

2020

Lionel Martellini, Vincent Milhau, John Mulvey


“Flexicure” Retirement Solutions: A Part of the Answer to the Pension Crisis?

2020

Lionel Martellini, Vincent Milhau, John Mulvey


Advances in Retirement Investing

2020

MARTELLINI Lionel, MILHAU Vincent


"Flexicure" Retirement Solutions: A Part of the Answer to the Pensions Crisis?"

2019

Lionel Martellini, Vincent Milhau, John Mulvey


Assets’ Correlation Implications for Portfolio Insurance Strategies Performance

2019

Daniel Mantilla-Garcia, Enrique ter Horst, German Molina, Emilien Audeguil


Introducing “Flexicure” Goal-Based Investing Retirement Solutions

2018

Lionel Martellini, Vincent Milhau, John Mulvey


Applying Goal-Based Investing Principles to the Retirement Problem - Executive Summary

2018

Kevin Giron , Lionel Martellini , Vincent Milhau , John Mulvey , Anil Suri


Applying Goal-Based Investing Principles to the Retirement Problem

2018

Kevin Giron, Lionel Martellini, Vincent Milhau, John Mulvey, Anil Suri


Intensity-based framework for surrender modeling in life insurance

2017

Vincenzo Russo, Rosella Giacometti, Frank J. Fabozzi


Introducing A Comprehensive Investment Framework For Goals-Based Wealth Management

2015

Romain Deguest, Lionel Martellini, Vincent Milhau, Anil Suri, Hungjen Wang


Mass Customization in Life-Cycle Investing Strategies with Income Risk

2015

Romain Deguest, Lionel Martellini, Vincent Milhau


A Three-Factor Model for Mortality Modeling

2015

Vincenzo Russo, Rosella Giacometti, Svetlozar Rachev, Frank J. Fabozzi


Equity Portfolios with Improved Liability-Hedging Benefits

2014

Guillaume Coqueret, Romain Deguest, Lionel Martellini, Vincent Milhau


LTGA Impact Assessment and Bond Management: Has Solvency II reached a Deadlock?

2013

Liliana Arias, Mohamed El Hedi Arouri, Philippe Foulquier


Investment Solutions For East Asia's Pension Savings

2013

Frédéric Blanc-Brude, François Cocquemas, Albena Georgieva


Hedging Versus Insurance: Long-Horizon Investing With Short-Term Constraints

2013

Romain Deguest, Lionel Martellini,Vincent Milhau


The Impact of Solvency II on Bond Management

2012

Liliana Arias, Philippe Foulquier, Alexandre Le Maistre


Long-Term Investing Strategies In Private Wealth Management

2012

Noël Amenc, Romain Deguest, Lionel Martellini, Vincent Milhau


What Asset-Liability Management Strategy For Sovereign Wealth Funds?

2012

Frédéric Ducoulombier , Lixia Loh , Stoyan Stoyanov


A comparison of the Lee–Carter model and AR–ARCH model for forecasting mortality rates

2012

Rosella Giacomettia, Marida Bertocchi, Svetlozar T. Rachev, Frank J. Fabozzi


Introducing the EDHEC-Risk Solvency Benchmarks - Maximising the Benefits of Equity Investments for Insurance Companies facing Solvency II Constraints

2012

Noël Amenc, François Cocquemas, Romain Deguest, Philippe Foulquier, Lionel Martellini, Samuel Sender


Response to the European Commission White Paper "An Agenda for Adequate, Safe and Sustainable Pensions"

2012

Noël Amenc, François Cocquemas, Lionel Martellini, Samuel Sender


Liability Index Fund: The Liability Beta Portfolio

2011

Ronald J. Ryan, Frank J. Fabozzi


Life-Cycle Investing In Private Wealth Management

2011

Romain Deguest, Lionel Martellini, Vincent Milhau


EDHEC-Risk European Private Wealth Management Survey

2010

Noel Amenc, Sergio Focardi, Felix Goltz, David Schroder, Lin Tang


New Frontiers In Benchmarking And Liability-Driven Investing

2010

Noel Amenc, Lionel Martellini, Felix Goltz, Vincent Milhau


Asset-Liability Management In Private Wealth Management

2009

Noel Amenc, Lionel Martellini, Vincent Milhau, Volker Ziemann


The Impact of Regulations on the ALM of European Pension Funds

2009

Noël Amenc, Lionel Martellini, Samuel Sender


Static Allocation Decisions in the Presence of Portfolio Insurance

2008

Felix Goltz, Lionel Martellini, Koray D. Simsek


The Benefits of Hedge Funds In Asset Liability Management

2008

Lionel Martellini, Véronique Le Sourd, Volker Ziemann


Optimal Investment Decisions When Time Horizon is Uncertain

2007

Christophette Blanchet-Scalliet, Nicole El Karoui, Monique Jeanblanc, Lionel Martellini


Asset-Liability Management Decisions In Private Banking

2007

Noel Amenc, Lionel Martellini, Volker Ziemann


The Impact Of IFRS And Solvency II On Asset-Liability Management And Asset Management In Insurance Companies

2006

Noël Amenc, Lionel Martellini, Philippe Foulquier, Samuel Sender


Improving investment performance for pension plans

2006

John M Mulvey, Koray D. Simsek, Zhuojuan Zhang


Modernizing the Defined-Benefit Pension System

2006

John M. Mulvey, Frank J. Fabozzi, William R. Pauling, Koray D. Simsek, Zhuojuan Zhang


Rebalancing Strategies for Long-Term Investors

2002

John M. Mulvey, Koray D. Simsek

Meaningful investment solutions should start with an understanding of clients’ goals. In retirement planning, the main challeng individuals face is to finance a sufficient and stable stream of replacement income in retirement. EDHEC-Risk Institute is grateful to Merrill Lynch for having supported a research project that has provided the conceptual foundations for the design of the EDHEC-Princeton Retirement Goal-Based Investing Index Series.

The Retirement Goal-Based Investing Indices, developed with the Operations Research and Financial Engineering Department at Princeton University as part of our joint research programme on Investment Solutions for Institutions and Individuals, are an example of these concepts being implemented. They represent asset allocation benchmarks for innovative mass-customised target date solutions for individuals preparing for retirement.

 

 

Exclusive interview with Anil Suri, Managing Director, Head of Portfolio Construction & Investment Analytics, Merrill Lynch Wealth Management

 

EDHEC-Princeton Goal Price Indices
Retirement Income
April 2021 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
16.25
20.08
US, 2028
14.23
19.40
US, 2033
12.35
18.59
US, 2038
10.73
17.82

EDHEC-Princeton Goal Price Indices
Retirement Wealth
April 2021 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
1.00
1.03
US, 2028
0.92
1.05
US, 2033
0.80
1.00
US, 2038
0.69
0.97

Construction Rules of Retirement Goal-Price Indices

 

HIGHLIGHTS DECEMBER 2020

  • US interest rates began 2020 with a downward move that accelerated with the expansion of the coronavirus pandemic in Europe in late February and early March and the increasing concerns over the economic impact. The 10-year rate fell from 1.88% after the New Year’s Eve to 0.50% on March 9, and the 1-year rate fell from 1.58% to 0.29%. Falling Treasury yields are mechanically reflected in rising Goal Price Indices through the discounting mechanism, and the price of $1 per year of replacement income for 20 years grew from $18.99 to $21.69 for an individual retiring in 2028;
  • During the Fall, long-term rates, represented for instance by the 10-year rate, showed a moderate increasing trend against the backdrop of promising news on vaccines, and this move led to a slight downturn in the price of replacement income. An individual expecting to retire in 2033 and targeting a 2% annual cost-of-living adjustment in benefits would pay $23.84 per dollar of replacement income in August 2020, and $21.82 in December. The change is less marked for someone who retires earlier, in 2023, because the impact of interest rate moves is smaller at these durations and rates of maturities shorter than 5 years moved less than long-term rates: for this individual, the decrease is only from $23.03 to $21.96.

Highlights History

 

EDHEC-Princeton Goal-Based Investing Indices
Retirement Income
March 2021 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
0.50
0.48
US, 2028
1.13
1.15
US, 2033
2.16
2.19
US, 2038
2.73
2.73

EDHEC-Princeton Goal-Based Investing Indices
Retirement Wealth
March 2021 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
1.21
1.21
US, 2028
1.05
1.05
US, 2033
1.66
1.66
US, 2038
2.73
2.73

Construction Rules of Retirement Goal-Based Investing Indices

 

HIGHLIGHTS DECEMBER 2020

  • End of Winter featured historically large losses in equity indices around the world, and the S&P 500 index was no exception, with a drawdown by more than 40% from February 20 to March 20. With decreasing interest rates at the same time, these were hard times for portfolio insurance strategies with a fixed-income floor and a performance-seeking portfolio dominated by equities, and Goal-Based Investing indices, that have a similar rebalancing rule, were logically impacted in the same way. The procyclical nature of the investment strategy implies a higher allocation to the goal-hedging portfolio, which replicates the performance of a goal-price index. For someone retiring in 2028 and targeting inflation-adjusted replacement income, the GHP share went from 46% at the January rebalancing to 87.9% in April;
  • For the longest horizon, which corresponds to a 2038 retirement date, and the longer retirement bond duration, which corresponds to 20 years of replacement income, the swing was even larger, from 26% in January to 100% in April. Once the portfolio is fully invested in the GHP, it remains “sterilized” in this state until the floor is reset back to a lower value, so as to replete the risk budget. The next reset is to take place shortly, in January 2021;
  • The other indices, which have a non-zero risk budget, benefitted from the recovery in the equity market as of April. The index for an individual retiring in 2028 with 20 years of inflation-adjusted income had a return of 5.17% from April to December, while the corresponding Goal Price Index, which is its natural benchmark, displayed a 3.98% loss. This amounts to a 9.53% gain in the purchasing power in terms of replacement income, so the equity building block did boost the performance of these indices during that period.

Highlights History

 

The research conducted in this programme relates to the design of novel welfare-improving forms of investment solutions for institutions and individuals.

Swiss Life Asset ManagementEDHEC-Risk is collaborating with Swiss Life Asset Management to examine how dedicated forms of real estate investments can be used as part of goal hedging portfolios within improved retirement solutions, based on their ability to generate inflation-linked replacement income cash flows. This project also involves analysis of how insurance products can be integrated into real estate investments to provide a comprehensive solution for all stages of retirement.

 

 

FirstRandThis research programme currently benefits from the support of FirstRand for a research chair on the design and implementation of welfare-improving investment solutions for institutions and individuals. The aim of the chair is to expand the scientific literature on investor welfare-enhancing methodologies for portfolio construction in a goal-based investing framework.

 

 

Bank of America Merrill LynchOn the individual side, EDHEC-Risk has received renewed support from Bank of America Merrill Lynch to develop new research on goal-based investing for the construction of retirement investment solutions for individuals and develop a holistic goal-based investing framework to analyse optimal retirement investing decisions for individuals in the transition or de-accumulation phase of their investment lifecycle, by using a broad range of investment product categories including stocks and bonds as well as annuity-related products.

The research conducted at EDHEC-Risk Institute on goal-based investment solutions has also led to a consulting assignment with MLWM on the construction of dynamic retirement solutions, as well as the launch of the EDHEC-Princeton retirement goal-based indices, again with the support of MLWM. EDHEC-Risk Institute’s ambition is to develop strategic partnerships with investment managers worldwide for the launch and promotion of meaningful mass-customised investment solutions for individuals. It has also built upon previous work supported by ORTEC and Pictet on ALM for individuals, as well as a research chair supported by La Française AM on improved forms of target date funds.

 

On the institutional side, this research programme has benefited from the support of BNP Investment Partners for a research chair on dynamic liability-driven investment solutions. It has also benefited from the support of the Ontario Teachers’ Pension Plan for a research chair on improved methods for inflation-linked liability hedging, and Deutsche Bank for a research chair on asset-liability management techniques for sovereign wealth fund management.

The research conducted at EDHEC-Risk Institute on liability-driven investment solutions has also led to a consulting assignment with CalPERS on the construction of a comprehensive factor-based asset-liability management framework conducted jointly with Professor John Mulvey from Princeton University’s ORFE department.