We estimate values-at-risk in the accumulation phase of defined contribution
pension plans. We examine a range of asset-return models (including
stationary moments, regime switching and fundamentals models) and
a range of asset- allocation strategies (both static and with simple
dynamic forms, such as lifestyle, threshold and constant proportion
portfolio insurance).

We draw four conclusions from our investigations. First, we find that defined
contribution (DC) plans can be extremely risky relative to a defined benefit (DB)
benchmark (far more so than most pension plan professionals would be likely
to admit). Second, we find that the VaR estimates are sensitive both to the
asset-return model used (to some extent) and its parameterisation (rather more
so), although the choice of asset-return model is less important than the
asset-allocation strategy selected. Third, a static asset-allocation strategy
delivers substantially better results than any of the dynamic strategies investigated
over the long term (40 years) of the sample policy. This is important given that
lifestyle strategies are the cornerstone of many DC plans. Fourth, conservative
bond-based asset-allocation strategies require substantially higher contribution
rates than more risky equity-based strategies if the same retirement pension
is to be achieved.