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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
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

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.

Type
Article
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press

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