Frequency of Adjusting Asset Allocations in the Life-Cycle Pension Model: When Doing More Is Not Necessarily Better

In the present study, we make an effort to enhance practical advantages of the life-cycle pension model and hypothesize that the pension funds and their members may be made better off if the funds adjust their asset allocations on a less frequent basis, in order to better exploit the return potential of more risky assets. We consider a hypothetical Israeli employee and analyze a number of pension savings glide-paths with different frequency of switches between the major asset classes. We compare the performance of the glidepaths by employing an estimation-based and a simulation-based technique. The results demonstrate that by decreasing the frequency of switches in the framework of the lifecycle model, pension funds can achieve: (i) higher estimated annualized real returns and accumulated savings; (ii) higher expected risk-adjusted performance measures; and (iii) significantly higher simulated mean and median values of real accumulated savings. Moreover, we document that, though decreasing the frequency of switches slightly increases the standard deviation of the employee's terminal wealth, it does not lead to critically low pension savings levels even for relatively unfavorable sequences of financial assets' returns. On the other hand, both empirical techniques prove that keeping the initial asset allocation proportions constant throughout the employees' working career (life-style approach) significantly increases the pension funds' risk levels without significantly increasing their pension portfolio returns.