Sensitivity Analysis of Accumulated Savings in Defined Contribution Pension System

Abstract

In this article we analyze the effect of parameters in the standard model for calculation of accumulated savings in a defined contribution pension system. Three parameters affect accumulated savings in the standard model: saving duration, return of the pension fund and the growth in employee gross wage. By using a linear approximation we calculated marginal contributions for small changes in the parameters of the standard model and analyzed their relations for a set of referent parameters which are most suitable for the 2nd pillar pension system in Croatia. It is shown that the return of a pension fund has a major influence on accumulated savings, while the influence of the growth in employee gross wage is slightly smaller. Also, we calculated the influence of raising the contribution rate in the 2nd pillar on the accumulated savings in a simple scenario in which that rate is raised by equal amounts over the whole of a saving period. These results allow easier planning of pension insurance in the defined contribution system at a general level as well as at an individual level.

Keywords

• defined contribution system
• pension funds
• parametric model
• sensitivity analysis