Performance measurement of pension strategies: a case study of Danish life-cycle products

The Danish pension market of life-cycle products have expanded considerably since its introduction in the beginning of the millennium. The market is maturing and pensioners have the choice between a wide area of different products. It is therefore about time that financial insurance technology is developed to guide the performance measurement of available products. In this paper we develop a simple first version of such a method and we investigate life-cycle products recommended on the web of the four biggest commercial Danish pension companies on one day in February 2007. All considered products are outperformed by trivial benchmark products with constant stock proportion over time. Our approach is the following: for each life-cycle product we first find a trivial benchmark product with the same longterm risk and then we compare the long-term return of the two equivalent products. We primarily consider value at risk (VaR) and tail VaR as risk measures, but we also include a study where the fair value of an interest guarantee is used as risk measure. We consider both long-term mean returns and long-term median returns. We hope that our new method will be regarded as a first step toward a scientifically based ranking of the quality of pension products.