Optimal asset allocation for pension funds under mortality risk during the accumulation and decumulation phases

Abstract

In a financial market with one riskless asset and n risky assets whose prices are lognormal, we solve in a closed form the problem of a pension fund maximizing the expected CRRA utility of its surplus till the (stochastic) death time of a representative agent. We consider a unique asset allocation problem for both accumulation and decumulation phases. The optimal investment in the risky assets must decrease during the first phase and increase during the second one. We accordingly suggest it is not optimal to manage the two phases separately, and outsourcing of allocation decisions should be avoided in both phases

Pension Funds with a Minimum Guarantee: A Stochastic Control Approach

“…Regarding demographic factors, we recall that in a constant interest rate framework the mortality risk has been taken into consideration by [Battocchio, Menoncin & Scaillet, 2007].…”

An Optimal Turkish Private Pension Plan with a Guarantee Feature

“…For example, Haberman and Sung [2] try to minimize the 'solvency' and 'contribution rate' risks in order to stabilize the pension fund, and Cairns et al try to optimize the terminal utility gained from the pension fund with a stochastic interest rate [3]. Some other examples of the studies that deal with the optimal asset allocations for pension funds can be found in [4][5][6][7][8][9][10][11][12][13][14][15][16][17][18][19][20]. On the other hand, there are limited numbers of studies that consider a target or a guaranteed wealth concept.…”

Determining Equivalent Charges on Flow and Balance in Individual Account Pension Systems

“…Haberman and Vigna (2001) consider downside risk of an optimal asset allocation strategy derived from a discrete-time dynamic programming approach. Salary risk and inflation risk were incorporated in Battocchio and Menoncin (2004) and Han and Hung (2012) while maximizing the expected utility of terminal wealth. Battocchio, Menoncin, and Scaillet (2004) and Yang and Huang (2009) incorporate longevity risk in the optimal asset allocation of a DC plan; the former using as objective expected utility, and the latter deviation of terminal wealth with respect to a predetermined target.…”

“…Salary risk and inflation risk were incorporated in Battocchio and Menoncin (2004) and Han and Hung (2012) while maximizing the expected utility of terminal wealth. Battocchio, Menoncin, and Scaillet (2004) and Yang and Huang (2009) incorporate longevity risk in the optimal asset allocation of a DC plan; the former using as objective expected utility, and the latter deviation of terminal wealth with respect to a predetermined target. Stochastic lifestyling under terminal utility with habit formation is found and compared with other strategies in Cairns, Blake, and Dowd (2006).…”