Seminar in applied mathematics and statistics

SPEAKER: Catherine Donnelly (Heriot-Watt University)

TITLE: Are customer needs driving the retirement industry?

ABSTRACT:
We are in the midst of a slow-burning pensions crisis in the UK. Individuals who wish to save for their retirement are asked to assess their 'risk appetite' through an online questionnaire and then decide how much to invest in equities. Subsequently, they receive regular statements from their fund manager showing the value of their retirement savings and their investment return over the year.

Yet the individual is generally seeking an inflation-proofed income in retirement. They should not be asked how they should invest for retirement, as they are not financial experts. They should be given information that has an explicit interpretation for their retirement income goals: are historical investment returns the best way to do this? Individuals are forced into a decision-making framework that is highly confusing even to the highly-educated person.

Following an approach proposed by the Nobel Laureate Robert C. Merton, we suggest how retirement income decisions could be made by the individual in a discussion with their financial adviser. We solve for the investment strategy that allows these income goals to be reached, by solving an optimal stochastic control problem set in a suitable financial market model. Our approach allows the individual to understand the impact of changing their retirement income goals in a perhaps more easily understood way, and removes the implicit need for them to become financial experts.

This is joint work with Montserrat Guillen (University of Barcelona), Jens Perch Nielsen (Cass Business School) and Ana Maria Perez-Marin (University of Barcelona).

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Tea and chocolate will be served on the 4th floor after the seminar.

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UPCOMING SEMINARS:

November 18, 15:15: Catherine Donnelly (Heriot-Watt University)

December 2, 15:15: Harry Zheng (Imperial College)

December 9, 11:15: Lina von Sydow (Univ. Uppsala)

December 9, 15.15: Anand Vidyashankar (George Mason University)