ABSTRACT
The recent financial turmoil has highlighted the importance of default investment options in mandatory DC pensions, especially for individuals close to retirement. Participants in mandatory DC pensions fully bear the investment risk, which they are likely to be badly equipped to assess, monitor, and mitigate. At the same time, the disconnection between the accumulation phase and the decumulation phase appears to leave excessive degrees of freedom to asset managers in implementing the strategic asset allocation through tactical decisions, which may not be consistent with participants’ preferences. is issue is particularly relevant to several countries in Latin America and Eastern Europe that have recently adopted the “multi-fund” design for investment choices and default options and many more that are currently considering the adoption of similar products in the coming years. Many of these countries are currently considering policy options that aim at shielding individuals from excessive market risk. ese include the possible introduction of lifetime government guarantees like in Hungary, outright reversion to earning-related pensions like in Argentina, or a re nement of default investment options as discussed in this note.
