Abstract
In defined contribution pension plan, the determination of the equivalent administrative charges on balance and on flow is investigated if the risk asset follows a constant elasticity of variance (CEV) model. The maximum principle and the stochastic control theory are applied to derive the explicit solutions of the equivalent equation about the charges. Using the power utility function, our conclusion shows that the equivalent charge on balance is related to the charge on flow, risk-free interest rate, and the length of accumulation phase. Moreover, numerical analysis is presented to show our results.
Highlights
The defined contribution (DC) pension plan is a scheme that contribution is fixed in individual pension systems, which help us to ensure our life after retirement
Gao [4] finds out the optimal investment strategy and extends the geometric Brownian motion (GBM) model to the constant elasticity of variance (CEV) model
Sheng and Rong [10] study the optimal time consistent investment strategy for the DC pension merged with an annuity contract, which focuses on the return of premiums clauses under the Heston’s stochastic volatility model
Summary
The defined contribution (DC) pension plan is a scheme that contribution is fixed in individual pension systems, which help us to ensure our life after retirement. There are many literatures to study the optimal investment strategies for DC pension plan. Wang et al [5] discuss the CEV model in a study of optimal investment strategy for the exponential utility function by using the Legendre transform method. Guan and Liang [7] investigate optimal investment strategy of DC pension plan under a stochastic interest rate and stochastic volatility model, which includes the CIR, Vasicek and Heston’s stochastic volatility models. Luis [12] provides a methodology to compare administrative charges, i.e., the commission of the pension management in which affiliates would pay to the Pension Fund Administrator (PFA), including the charge on balance and charge on flow.
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