Dynamic and Static Strategies for the Funded Pillar of the Slovak Pension System

Since January 2005, pensions in Slovakia are operated by a three-pillar system proposed by the World Bank. The paper discusses and mathematically captures principles of the pension reform in Slovakia. We also discuss the impact of the reform on the deficit of the pension system. We mainly focus on the mandatory, fully funded second pillar. We present a dynamic decision model for determining the optimal switching strategy between pension funds with different risk profiles. The resulting strategies depend on individual risk preferences of future pensioners. Our results illustrated the fact that gradual decreasing of the risk during the saving for future pension is rational. Moreover, it is shown that dynamic decision strategies outperform the static ones