Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational Pension Plans in South Korea

We assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extre...

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Bibliographic Details
Published in:Asia-Pacific journal of financial studies 2022, 51(5), , pp.709-734
Main Authors: Jung, Hyeonjong, Lee, Dong‐Hwa, Cheong, Do Young
Format: Article
Language:English
Subjects:
ALM
Conditional surplus at risk
Defined benefit plans
E32
E37
G11
Hidden Markov model
Markov analysis
Optimization
Optimization techniques
Portfolio
경영학
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Summary:We assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal‐protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime‐switching model outperforms an unconditional static portfolio.
ISSN:2041-9945
2041-6156
DOI:10.1111/ajfs.12396