The optimal cyclical design for a target benefit pension plan

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...

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Bibliographic Details
Published in:Journal of pension economics & finance 2023-07, Vol.22 (3), p.284-303
Main Authors: Chen, Lv, Li, Danping, Wang, Yumin, Zhu, Xiaobai
Format: Article
Language:English
Subjects:
Defined contribution plans
Design
Economic crisis
Finance
Interest rates
Investments
Pension plans
Regulation
Retirees
Retirement benefits
Risk sharing
Sustainability
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Summary: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.
ISSN:1474-7472
1475-3022
DOI:10.1017/S1474747222000099