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Optimizing the Aging, Retirement and Pensions Dilemma. Marida Bertocchi, Sandra L. Schwartz, and William T. Ziemba, Wiley, 2010, ISBN 978-0-470-37734-5, 411 pages.

Published online by Cambridge University Press:  04 January 2012

David Mccarthy
Affiliation:
Imperial College, London
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Abstract

Type
Book Review
Copyright
Copyright © Cambridge University Press 2011

This is a three-part volume on broad issues in retirement, savings and pensions. The first part deals with general issues in the economics and financial economics of pensions and retirement, the second is a collection of academic essays on a diverse range of retirement-related topics, and the third presents some applications of discrete-time stochastic dynamic programming to corporate and individual pension decisions. The approach of the volume varies greatly from chapter to chapter, and it is therefore difficult to decide who the target audience is meant to be. The book is likely to be most useful to practitioners who have an interest using stochastic programming to determine pension fund and individual asset allocation. For these readers, though, other parts of the book will be of little interest. In my view the authors may have erred by trying to make the scope of the volume too broad. It would have been better to focus more narrowly on stochastic programming applied to long-run investment policy inside and outside pension funds. As a summary of the overall issue of the economics and finances of retirement and pensions it is not a great success, and those looking for a general and accessible treatment of these issues should in my view look elsewhere.

The best parts of the book are the second and third sections. Individual chapters in the second section include an excellent summary of the academic literature on the relationship between population ageing and asset returns (Marianna Brunetti and Costanza Torricelli), a chapter on whether DB pension plans should be final salary or career average (Charles Sutcliffe) and a summary of recent developments in the market for mortality-linked securities (David Blake and Enrico Biffis). Other chapters in this section deal with stochastic programming and continuous-time portfolio theory applied to corporate pension funds, sovereign wealth funds and asset–liability management for retirement. Each of these chapters is likely to be useful both to academics and practitioners looking for an accessible insight into the academic literature and recent developments on these topics.

The third part of the book builds on some of the chapters in the second section by looking at various discrete-time asset–liability modelling frameworks that have been applied to corporate pensions, including the Siemens Pension Fund in Austria. The model is highly flexible, and allows pension funds to determine an optimal asset allocation strategy, and to assess the effect of various policy choices, under different economic conditions, goals, constraints and liability profiles. Two final chapters apply a stochastic dynamic programming model to a lifetime consumption and investment problem. The model is designed with a heavy focus on the practical aspects of asset markets, which increases its practical value. However, this comes at the expense of important issues such as human capital wealth, inter-temporal consumption, and the elasticity of consumption with respect to wealth, all of which are standard in the portfolio theory literature which stems from the Life-Cycle/Permanent Income Hypothesis. Overall, though, these chapters treat important questions in a technical and yet accessible way that emphasises the practical application of difficult models to these real problems.

In the parts of the book dealing with the broad issues of retirement, pensions and saving, especially in the first section, there are unfortunately some issues of style and substance which make it difficult to recommend them. This section would have been more useful had the underlying economics been more clearly and rigorously explained, and if a greater range of the academic literature had been referred to (and less of the popular press). The style here is also sometimes too casual even for a practitioner volume, and there are numerous grammatical and typographic mistakes. In some cases, these make it difficult to understand exactly what the authors are trying to say on quite important questions.