Thomas Sneddon - Academia.edu (original) (raw)
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Papers by Thomas Sneddon
SSRN Electronic Journal, 2014
ABSTRACT The Australian retirement income system obligates employers to pay a percentage of salar... more ABSTRACT The Australian retirement income system obligates employers to pay a percentage of salary (currently 9.5%) on behalf of each employee directly into a superannuation fund which cannot be accessed (except in extraordinary circumstances) prior to the national minimum re-tirement age. The system has received strong praise for its high participation rates (driven by compulsion) and for ensuring retirees have resources from which they can support their own post-retirement lifestyle. However, recent discourse, particularly in the context of increasing life expectancy and a maturing superannuation system, has highlighted the potential inadequacy of savings provision under the superannuation systems current structure. In this paper we consider the question of adequacy. We build a stochastic model of superannuation, the SUPA (Simula-tion of Uncertainty for Pension Analysis) model, and use this model to simulate the evolution of superannuation fund balances across time. The model comprises four elements: (i) a stochastic projection of investment returns; (ii) a stochastic projection of income levels (upon which con-tributions to the fund are based); (iii) a projection of levels of withdrawal in retirement; and (iv) a stochastic projection of increasing longevity. The combination of these four elements into the SUPA model along with some applications are described in detail in this paper. In particular, 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 structures. It can also be used to statistically model the potential impacts of any changes to the superannuation system, i.e. changing retirement ages or contribution rates.. Acknowledgements: This paper has been achieved with the support of the Monash CSIRO superannuation cluster and thanks go to the many stimulating conversations had at CSIRO-Monash superannuation cluster meetings. 1 2 O'HARE, SNEDDON AND ZHO
Weber, T., McPhee, M.J. and Anderssen, R.S. (eds) MODSIM2015, 21st International Congress on Modelling and Simulation, 2015
Australia has a compulsory defined contribution retirement provision system, whereby employers mu... more Australia has a compulsory defined contribution retirement provision system, whereby employers must contribute a proportion of the pre-tax salary of their employees towards an individual account which cannot be accessed until retirement except in extraordinary circumstances. These funds are generally invested in a portfolio of financial assets from which the retiree may draw throughout retirement. Retirees under this system face two key problems when making investment and withdrawal decisions regarding this portfolio. Firstly, retirees must manage their superannuation investment portfolio to maximise their riskadjusted returns and thereby best financially provide for their own retirement. Secondly, retirees must optimise their withdrawal pattern from the superannuation account throughout retirement so as to maximise their post-retirement lifetime utility given the need to minimise the risk of portfolio ruin prior to death. We model this issue as a dynamic stochastic optimisation problem with constraints. The market value of the portfolio is a function of the annual contributions invested by the individual throughout their career and the returns derived from their investment in uncertain financial markets. The post-retirement lifetime utility function is a function of discounted annual income throughout retirement and is therefore subject to market and inflation risk. We model the financial market uncertainties as correlated stochastic processes as projected by a variant on the Wilkie stochastic investment model developed within CSIRO, the SUPA (Simulation of Uncertainty for Pension Analysis) model. We also define an income protection asset (an inflation index linked annuity) which is available to the individual as a tool to hedge inflation risk. We then solve the dynamic superannuation/pension portfolio optimisation problem using a numerical approach that is based on the stochastic control algorithm to calculate the conditional value functions of investors for a sequence of discrete decision dates. The algorithm provides optimal decisions for portfolio asset allocation in financial markets and the optimal amount to shift towards the annuity product on an annual basis to achieve maximum post-retirement lifetime utility whilst minimising the risk of portfolio ruin prior to death.
SSRN Electronic Journal, 2014
ABSTRACT The Australian retirement income system obligates employers to pay a percentage of salar... more ABSTRACT The Australian retirement income system obligates employers to pay a percentage of salary (currently 9.5%) on behalf of each employee directly into a superannuation fund which cannot be accessed (except in extraordinary circumstances) prior to the national minimum re-tirement age. The system has received strong praise for its high participation rates (driven by compulsion) and for ensuring retirees have resources from which they can support their own post-retirement lifestyle. However, recent discourse, particularly in the context of increasing life expectancy and a maturing superannuation system, has highlighted the potential inadequacy of savings provision under the superannuation systems current structure. In this paper we consider the question of adequacy. We build a stochastic model of superannuation, the SUPA (Simula-tion of Uncertainty for Pension Analysis) model, and use this model to simulate the evolution of superannuation fund balances across time. The model comprises four elements: (i) a stochastic projection of investment returns; (ii) a stochastic projection of income levels (upon which con-tributions to the fund are based); (iii) a projection of levels of withdrawal in retirement; and (iv) a stochastic projection of increasing longevity. The combination of these four elements into the SUPA model along with some applications are described in detail in this paper. In particular, 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 structures. It can also be used to statistically model the potential impacts of any changes to the superannuation system, i.e. changing retirement ages or contribution rates.. Acknowledgements: This paper has been achieved with the support of the Monash CSIRO superannuation cluster and thanks go to the many stimulating conversations had at CSIRO-Monash superannuation cluster meetings. 1 2 O'HARE, SNEDDON AND ZHO
Weber, T., McPhee, M.J. and Anderssen, R.S. (eds) MODSIM2015, 21st International Congress on Modelling and Simulation, 2015
Australia has a compulsory defined contribution retirement provision system, whereby employers mu... more Australia has a compulsory defined contribution retirement provision system, whereby employers must contribute a proportion of the pre-tax salary of their employees towards an individual account which cannot be accessed until retirement except in extraordinary circumstances. These funds are generally invested in a portfolio of financial assets from which the retiree may draw throughout retirement. Retirees under this system face two key problems when making investment and withdrawal decisions regarding this portfolio. Firstly, retirees must manage their superannuation investment portfolio to maximise their riskadjusted returns and thereby best financially provide for their own retirement. Secondly, retirees must optimise their withdrawal pattern from the superannuation account throughout retirement so as to maximise their post-retirement lifetime utility given the need to minimise the risk of portfolio ruin prior to death. We model this issue as a dynamic stochastic optimisation problem with constraints. The market value of the portfolio is a function of the annual contributions invested by the individual throughout their career and the returns derived from their investment in uncertain financial markets. The post-retirement lifetime utility function is a function of discounted annual income throughout retirement and is therefore subject to market and inflation risk. We model the financial market uncertainties as correlated stochastic processes as projected by a variant on the Wilkie stochastic investment model developed within CSIRO, the SUPA (Simulation of Uncertainty for Pension Analysis) model. We also define an income protection asset (an inflation index linked annuity) which is available to the individual as a tool to hedge inflation risk. We then solve the dynamic superannuation/pension portfolio optimisation problem using a numerical approach that is based on the stochastic control algorithm to calculate the conditional value functions of investors for a sequence of discrete decision dates. The algorithm provides optimal decisions for portfolio asset allocation in financial markets and the optimal amount to shift towards the annuity product on an annual basis to achieve maximum post-retirement lifetime utility whilst minimising the risk of portfolio ruin prior to death.