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Pension Fund Design under Long-term Fairness Constraints

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  • Esben Masotti Kryger

    (Laboratory of Actuarial Mathematics, Department of Mathematical Sciences, University of Copenhagen, Universitetsparken 5, København Ø, DK-2100, Denmark)

Abstract

We consider optimal portfolio insurance for a mutually owned with-profits pension fund. First, intergenerational fairness is imposed by requiring that the pension fund is driven towards a steady state. Subject to this condition the optimal asset allocation is identified among the class of constant proportion portfolio insurance strategies by maximising expected power utility of the benefit. For a simple contract approximate analytical results are available and accurate, whereas for a more involved contract Monte Carlo methods must be applied to pick out the best design. The main insights are (i) aggressive investment strategies are disastrous for the clients; (ii) in most cases it is optimal to gear the bonus reserve; and (iii) the results are far less sensitive to the agent's risk aversion than in the classical case of Merton (1969), and as opposed to Merton horizon matters even with constant investment opportunities (because of the serial dependence between bonuses).

Suggested Citation

  • Esben Masotti Kryger, 2010. "Pension Fund Design under Long-term Fairness Constraints," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 35(2), pages 130-159, December.
    • Handle: RePEc:pal:genrir:v:35:y:2010:i:2:p:130-159
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    Cited by:

    1. Jarner, Søren Fiig & Kronborg, Morten Tolver, 2016. "Entrance times of random walks: With applications to pension fund modeling," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 1-20.

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