Implications of centrally managed pensions under DRRA

We study the life-cycle implications of centrally managed defined-contribution pension schemes under household preferences with decreasing relative risk aversion. Our framework tracks heterogeneous households—differentiated by human wealth trajectories—in varying financial market scenarios, while pension wealth is invested according to an exogenous asset allocation rule that does not adapt to individual risk preferences. In the benchmark setting, such constraining pension accounts consistently generate negligible effects on household welfare relative to a first-best environment (i.e., no pension account). Consequently, policies that merely reduce pension account size, such as capped contributions or lump-sum decumulation at retirement, are expected to be neutral by neither improving nor diminishing lifetime household welfare. By contrast, policies that enhance the attractiveness of participation are shown to produce substantive effects. Intergenerational risk-sharing combined with a leveraged risk exposure emerges as the strongest welfare-improving arrangement for pension plan participants, delivering gains across nearly all business cycle scenarios by smoothing shocks in downturns while enabling scaled risk-taking in upturns. Leverage alone generates boom-bust reinforcing outcomes, with losses in poor markets but sizeable benefits in favorable states. Tax deferral with a retirement tax break reliably improves household welfare through both an increase in investable liquidities and a lower lifetime taxation, while pure deferral without a break produces modest but consistently positive effects. Finally, exempting pension returns from taxation is downside-sensitive: it erodes implicit insurance, exacerbates sensitivity to downturns and yields only limited upsides in booms.