Optimal VIX-linked structure for the target benefit pension plan

In this paper, we study the optimal VIX-linked target benefit (TB) pension design. By applying the dynamic programming approach, we show the optimal risk-sharing structure for the benefit payment exhibits a linear form that consists of three components: (1) a model-robust performance adjustment, (2)...

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Bibliographic Details
Published in:ASTIN Bulletin : The Journal of the IAA 2024-01, Vol.54 (1), p.75-93
Main Authors: Chen, Lv, Li, Danping, Wang, Yumin, Zhu, Xiaobai
Format: Article
Language:English
Subjects:
Actuarial science
Cost of living adjustments
Defined contribution plans
Equity
Expected utility
Hedging
Numerical analysis
Pension plans
Retirees
Retirement
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Summary:In this paper, we study the optimal VIX-linked target benefit (TB) pension design. By applying the dynamic programming approach, we show the optimal risk-sharing structure for the benefit payment exhibits a linear form that consists of three components: (1) a model-robust performance adjustment, (2) a counter-cyclical volatility adjustment that depends on the VIX index, and (3) a TB level that is partially indexed to the cost-of-living adjustment. Differences between our results and the previous literature are highlighted via both theoretical derivations and numerical illustrations.
ISSN:0515-0361
1783-1350
DOI:10.1017/asb.2023.33