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The optimal cyclical design for a target benefit pension plan

Published online by Cambridge University Press:  01 July 2022

Lv Chen ,
Danping Li ,
Yumin Wang  and
Xiaobai Zhu
Lv Chen
Affiliation:
Academy of Statistics and Interdisciplinary Sciences, KLATASDS-MOE, East China Normal University, Shanghai, China
Danping Li*
Affiliation:
School of Statistics, KLATASDS-MOE, East China Normal University, Shanghai, China
Yumin Wang
Affiliation:
Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, Manitoba, Canada
Xiaobai Zhu
Affiliation:
Department of Insurance, Finance and Actuarial Science, Southwestern University of Finance and Economics, Chengdu, China
*
*Corresponding author. Email: dpli@fem.ecnu.edu.cn
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Abstract

In this paper, we derive the optimal cyclical design of a target benefit (TB) pension plan that balances the sustainability and the benefit stability using the optimal control approach. The optimal design possesses a linear risk sharing structure with cyclical parameters. We observe that the optimal design should be pro-cyclical in the usual circumstances, but counter-cyclical when the pension plan is severely in deficit. We compare the TB plans with the defined benefit plans and conclude that a more aggressive investment strategy should be adopted for the TB plans. In the end, we provide a cautionary note on the optimal control approach in the study of the TB plans.

Keywords

Hamilton–Jacobi–Bellman equationoptimal cyclical designregime switching modeltarget benefit pension planJ32
Type
Article
Information
Journal of Pension Economics & Finance , Volume 22 , Issue 3 , July 2023 , pp. 284 - 303
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press

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