Modelling defined contribution retirement outcomes: A stochastic approach using Australia as a case study

In this paper we present a stochastic forecast model in a defined contribution pension system for projecting the accumulation and decumulation phases from an individual fund perspective. We use the Australian superannuation system as the context to demonstrate this “SUPA” (Simulation of Uncertainty for Pension Analysis) model. The SUPA model can be used to simulate the evolution of superannuation fund balances across time during the accumulation and decumulation phases. The model comprises four elements: (1) a stochastic projection of investment returns;
(2) a stochastic projection of income levels (upon which contributions to the fund are based); (3) a projection of levels of withdrawal in retirement; and (4) a stochastic projection of increasing longevity (life table). The combination of these four elements within the SUPA model is described in detail in this paper. One application of the model is demonstrated through a case study involving recent Australian legislative amendments. In this example, we show how the model can be used to forecast likely outcomes (i.e. whether individuals will have sufficient funds in retirement), under the current superannuation structure and a previous structure. This will demonstrate how the SUPA model can be used to model the potential impact of any changes to a superannuation system.