Using a stochastic economic scenario generator to analyse uncertain superannuation and retirement outcomes

The retirement systems in many developed countries have been increasingly moving from Defined Benefit (DB) towards the Defined Contribution (DC) system. In such systems, financial and longevity risks are shifted from the pension provider to the retiree. This paper uses a probabilistic approach to analyse the uncertainty associated with the retirement accumulation and decumulation in a DC world. We use an economic scenario generator (ESG) called Simulation of Uncertainty for Pension Analysis (SUPA) to project uncertain future economic outcomes. As the retirement system in Australia is predominantly DC in nature, and to validate the accuracy of the SUPA model, we use a unique dataset of over five million Australian individuals over ten years obtained from the Australian Department of Human Services (DHS) to benchmark the effectiveness of the SUPA model for simulating the superannuation accumulation phase of individuals. Our probabilistic approach allows us to estimate various outcomes regarding the retirement accumulation and decumulation phases, such as worst-case percentiles accounting for the risks associated with investment returns and other economic variables. In particular, our approach provides an advanced tool to analyse the sustainability of popular drawdown strategies during retirement under the current pension and superannuation scheme