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Target benefit pension plan with longevity risk and intergenerational equity

Published online by Cambridge University Press:  12 January 2023

Ximin Rong ,
Cheng Tao  and
Hui Zhao
Ximin Rong
Affiliation:
School of Mathematics, Tianjin University, Tianjin 300350, PR China Center for Applied Mathematics, Tianjin University, Tianjin 300072, PR China
Cheng Tao*
Affiliation:
School of Mathematics, Tianjin University, Tianjin 300350, PR China
Hui Zhao
Affiliation:
School of Mathematics, Tianjin University, Tianjin 300350, PR China
*
*Corresponding author. E-mail: taocheng@tju.edu.cn
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Abstract

We study a stochastic model for a target benefit pension plan suffering from rising longevity and falling fertility. Policies for postponing retirement are carried out to hedge the payment difficulties caused by the aging population. The plan members’ contributions are set in advance while the pension payments reflect intergenerational equity by a target payment level and intergenerational risk sharing by an adjustment. The pension fund is invested in both a risk-free asset and a risky asset. Applying the stochastic optimal control methods, we derive analytic solutions for optimal investment and benefit payment strategies which minimize the benefit risk. Besides, an optimal delayed retirement age which can hedge against the aging phenomenon under certain parameters is given. Therefore, it can provide a basis for quantifying the delay of retirement time.

Keywords

Target benefit planlongevity riskintergenerational risk sharingintergenerational equitypostponing retirement
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 53 , Issue 1 , January 2023 , pp. 84 - 103
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of The International Actuarial Association

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Footnotes

‡

This article has been updated since its original publication. A notice detailing this change can be found here: https://doi.org/10.1017/asb.2023.9

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