Using a stochastic economic scenario generator to analyse uncertain superannuation and retirement outcomes

The retirement systems in many developed countries have been increasingly moving from defined benefit towards defined contribution system. In defined contribution systems, financial and longevity risks are shifted from pension providers to retirees. In this paper, we use a probabilistic approach to analyse the uncertainty associated with superannuation accumulation and decumulation. We apply an economic scenario generator called the Simulation of Uncertainty for Pension Analysis (SUPA) model to project uncertain future financial and economic variables. This multi-factor stochastic investment model, based on the Monte Carlo method, allows us to obtain the probability distribution of possible outcomes regarding the superannuation accumulation and decumulation phases, such as relevant percentiles. We present two examples to demonstrate the implementation of the SUPA model for the uncertainties during both phases under the current superannuation and Age Pension policy, and test two superannuation policy reforms suggested by the Grattan Institute.