IDEAS home Printed from https://ideas.repec.org/a/eee/insuma/v52y2013i2p404-410.html
   My bibliography  Save this article

Optimal dynamic asset allocation strategy for ELA scheme of DC pension plan during the distribution phase

Author

Listed:
  • He, Lin
  • Liang, Zongxia

Abstract

In this paper, we study the optimal dynamic asset allocation strategy for the ELA scheme of DC pension plan during the distribution phase. In an ELA scheme of DC pension plan, the assets are invested in equities and bonds, and are distributed to the plan participants by an actuarial method. The survived participant can also obtain a survival credit from the mortality risk-sharing implicit in the pension plan. The goal of the scheme is to maintain the stable purchasing power of the plan participants, i.e., to minimize the square deviations of the distribution and a predetermined level by choosing the optimal dynamic asset allocation proportions. We formalize the problem into a continuous-time stochastic optimal control problem and establish the optimal dynamic asset allocation strategy by stochastic dynamic programming method. We obtain the optimal dynamic asset allocation proportions invested in the equities and bonds, and give an economical explanation of the key factors influencing the strategy.

Suggested Citation

  • He, Lin & Liang, Zongxia, 2013. "Optimal dynamic asset allocation strategy for ELA scheme of DC pension plan during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 404-410.
    • Handle: RePEc:eee:insuma:v:52:y:2013:i:2:p:404-410
    DOI: 10.1016/j.insmatheco.2013.02.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167668713000176
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.insmatheco.2013.02.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Liang, Zongxia & Huang, Jianping, 2011. "Optimal dividend and investing control of an insurance company with higher solvency constraints," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 501-511.
    2. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
    3. He, Lin & Liang, Zongxia, 2008. "Optimal financing and dividend control of the insurance company with proportional reinsurance policy," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 976-983, June.
    4. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2004. "Optimal risk management in defined benefit stochastic pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 489-503, June.
    5. Gerrard, Russell & Haberman, Steven & Vigna, Elena, 2004. "Optimal investment choices post-retirement in a defined contribution pension scheme," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 321-342, October.
    6. Moshe Milevsky & Chris Robinson, 2000. "Self-Annuitization and Ruin in Retirement," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(4), pages 112-124.
    7. Steven Haberman & Elena Vigna, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," ICER Working Papers - Applied Mathematics Series 09-2002, ICER - International Centre for Economic Research.
    8. Haberman, Steven & Vigna, Elena, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 35-69, August.
    9. repec:bla:jfinan:v:59:y:2004:i:6:p:2809-2834 is not listed on IDEAS
    10. Wu, Liuren, 2003. "Jumps and Dynamic Asset Allocation," Review of Quantitative Finance and Accounting, Springer, vol. 20(3), pages 207-243, May.
    11. Han, Nan-wei & Hung, Mao-wei, 2012. "Optimal asset allocation for DC pension plans under inflation," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 172-181.
    12. Albrecht, Peter & Maurer, Raimond, 2001. "Self-Annuitization, Ruin Risk in Retirement and Asset Allocation: The Annuity Benchmark," Sonderforschungsbereich 504 Publications 01-35, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    13. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2001. "Minimization of risks in pension funding by means of contributions and portfolio selection," Insurance: Mathematics and Economics, Elsevier, vol. 29(1), pages 35-45, August.
    14. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 135-154.
    15. Cairns, Andrew, 2000. "Some Notes on the Dynamics and Optimal Control of Stochastic Pension Fund Models in Continuous Time," ASTIN Bulletin, Cambridge University Press, vol. 30(1), pages 19-55, May.
    16. He, Lin & Liang, Zongxia, 2009. "Optimal financing and dividend control of the insurance company with fixed and proportional transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 88-94, February.
    17. Vigna, Elena & Haberman, Steven, 2001. "Optimal investment strategy for defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 233-262, April.
    18. Albrecht, Peter & Maurer, Raimond, 2001. "Self-annuitization, ruin risk in retirement and asset allocation : the annuity benchmark," Papers 01-35, Sonderforschungsbreich 504.
    19. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
    20. Ngwira, Bernard & Gerrard, Russell, 2007. "Stochastic pension fund control in the presence of Poisson jumps," Insurance: Mathematics and Economics, Elsevier, vol. 40(2), pages 283-292, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Suxin & Lu, Yi & Sanders, Barbara, 2018. "Optimal investment strategies and intergenerational risk sharing for target benefit pension plans," Insurance: Mathematics and Economics, Elsevier, vol. 80(C), pages 1-14.
    2. Jung-Bin Su, 2020. "The Implementation of Asset Allocation Approaches: Theory and Evidence," Sustainability, MDPI, vol. 12(17), pages 1-28, September.
    3. Lin He & Zongxia Liang & Zhaojie Ren & Yilun Song, 2023. "Optimal Mix Among PAYGO, EET and Individual Savings," Papers 2302.09218, arXiv.org.
    4. Han, Nan-Wei & Hung, Mao-Wei, 2015. "The investment management for a downside-protected equity-linked annuity under interest rate risk," Finance Research Letters, Elsevier, vol. 13(C), pages 113-124.
    5. Thomas Bernhardt & Catherine Donnelly, 2020. "Quantifying the trade-off between income stability and the number of members in a pooled annuity fund," Papers 2010.16009, arXiv.org.
    6. He, Lin & Liang, Zongxia, 2015. "Optimal assets allocation and benefit outgo policies of DC pension plan with compulsory conversion claims," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 227-234.
    7. Liang, Zongxia & Ma, Ming, 2015. "Optimal dynamic asset allocation of pension fund in mortality and salary risks framework," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 151-161.
    8. Ankush Agarwal & Christian-Oliver Ewald & Yongjie Wang, 2020. "Sharing of longevity basis risk in pension schemes with income-drawdown guarantees," Papers 2002.05232, arXiv.org.
    9. He, Lin & Liang, Zongxia, 2013. "Optimal investment strategy for the DC plan with the return of premiums clauses in a mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 643-649.
    10. Sun, Jingyun & Li, Zhongfei & Zeng, Yan, 2016. "Precommitment and equilibrium investment strategies for defined contribution pension plans under a jump–diffusion model," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 158-172.
    11. Guan, Guohui & Liang, Zongxia, 2015. "Mean–variance efficiency of DC pension plan under stochastic interest rate and mean-reverting returns," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 99-109.
    12. Liang, Zongxia & Sheng, Wenlong, 2016. "Valuing inflation-linked death benefits under a stochastic volatility framework," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 45-58.
    13. He, Lin & Liang, Zongxia & Wang, Sheng, 2022. "Dynamic optimal adjustment policies of hybrid pension plans," Insurance: Mathematics and Economics, Elsevier, vol. 106(C), pages 46-68.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. He, Lin & Liang, Zongxia, 2013. "Optimal investment strategy for the DC plan with the return of premiums clauses in a mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 643-649.
    2. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 29-47, August.
    3. Josa-Fombellida, Ricardo & López-Casado, Paula, 2023. "A defined benefit pension plan game with Brownian and Poisson jumps uncertainty," European Journal of Operational Research, Elsevier, vol. 310(3), pages 1294-1311.
    4. Josa-Fombellida, Ricardo & Navas, Jorge, 2020. "Time consistent pension funding in a defined benefit pension plan with non-constant discounting," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 142-153.
    5. Guan, Guohui & Liang, Zongxia, 2016. "Optimal management of DC pension plan under loss aversion and Value-at-Risk constraints," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 224-237.
    6. Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2012. "Stochastic pension funding when the benefit and the risky asset follow jump diffusion processes," European Journal of Operational Research, Elsevier, vol. 220(2), pages 404-413.
    7. Yao, Haixiang & Yang, Zhou & Chen, Ping, 2013. "Markowitz’s mean–variance defined contribution pension fund management under inflation: A continuous-time model," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 851-863.
    8. Wang, Suxin & Lu, Yi & Sanders, Barbara, 2018. "Optimal investment strategies and intergenerational risk sharing for target benefit pension plans," Insurance: Mathematics and Economics, Elsevier, vol. 80(C), pages 1-14.
    9. Gerrard, Russell & Haberman, Steven & Vigna, Elena, 2004. "Optimal investment choices post-retirement in a defined contribution pension scheme," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 321-342, October.
    10. Yao, Haixiang & Lai, Yongzeng & Ma, Qinghua & Jian, Minjie, 2014. "Asset allocation for a DC pension fund with stochastic income and mortality risk: A multi-period mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 84-92.
    11. Han, Nan-Wei & Hung, Mao-Wei, 2015. "The investment management for a downside-protected equity-linked annuity under interest rate risk," Finance Research Letters, Elsevier, vol. 13(C), pages 113-124.
    12. Henrique Ferreira Morici & Elena Vigna, 2023. "Optimal additional voluntary contribution in DC pension schemes to manage inadequacy risk," Carlo Alberto Notebooks 699 JEL Classification: C, Collegio Carlo Alberto.
    13. Marina Di Giacinto & Elena Vigna, 2012. "On the sub-optimality cost of immediate annuitization in DC pension funds," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(3), pages 497-527, September.
    14. Wang, Suxin & Lu, Yi, 2019. "Optimal investment strategies and risk-sharing arrangements for a hybrid pension plan," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 46-62.
    15. Francesco Menoncin & Elena Vigna, 2013. "Mean-variance target-based optimisation in DC plan with stochastic interest rate," Carlo Alberto Notebooks 337, Collegio Carlo Alberto.
    16. Alessandra Milazzo & Elena Vigna, 2018. "The Italian Pension Gap: a Stochastic Optimal Control Approach," Carlo Alberto Notebooks 553, Collegio Carlo Alberto.
    17. Blake, David & Wright, Douglas & Zhang, Yumeng, 2013. "Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 195-209.
    18. Zhiping Chen & Liyuan Wang & Ping Chen & Haixiang Yao, 2019. "Continuous-Time Mean–Variance Optimization For Defined Contribution Pension Funds With Regime-Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(06), pages 1-33, September.
    19. Alessandro Milazzo & Elena Vigna, 2018. "The Italian Pension Gap: A Stochastic Optimal Control Approach," Risks, MDPI, vol. 6(2), pages 1-20, April.
    20. Guan, Guohui & Liang, Zongxia, 2016. "A stochastic Nash equilibrium portfolio game between two DC pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 237-244.

    More about this item

    Keywords

    Defined contribution pension plan; Equity-linked annuity (ELA) scheme; Optimal dynamic asset allocation; Stochastic dynamic programming; HJB equations;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:52:y:2013:i:2:p:404-410. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505554 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.