Understanding the Effect of Market Risks on New Pension System and Government Responsibility

Paper: arXiv 2408.13200

Authors: Sourish Das, Bikramaditya Datta, Shiv Ratan Tiwari

Abstract

This study examines how market risks impact the sustainability and performance of the New Pension System (NPS). NPS relies on defined contributions from both employees and employers to build a corpus during the employee’s service period. Upon retirement, employees use the corpus fund to sustain their livelihood. A critical concern for individuals is whether the corpus will grow sufficiently to be sustainable or if it will deplete, leaving them financially vulnerable at an advanced age. We explore the impact of market risks on the performance of the corpus resulting from the NPS. To address this, we quantify market risks using Monte Carlo simulations with historical data to model their impact on NPS. We quantify the risk of pension corpus being insufficient and the cost to the Government to hedge the risk arising from guaranteeing the pension.

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 5.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a straightforward and practical Monte Carlo simulation framework using standard Geometric Brownian Motion to model the National Pension System in India. While mathematically simple, it offers strong practical clarity and excellent reproducibility with open-source R code provided.

Research Flowchart

  flowchart TD
    A["Research Goal: Assess Market Risk on NPS & Government Guarantee Cost"] --> B["Data Inputs: Historical Financial Data & Defined Contribution Parameters"]
    B --> C["Methodology: Monte Carlo Simulations"]
    C --> D["Process: Model Market Risks & Project Pension Corpus Growth"]
    D --> E["Outcomes: Quantified Risk of Corpus Insufficiency & Government Hedging Costs"]