Abstract
The Korean National Pension Service (NPS) is a partially funded and defined-benefit system. Although the accumulated Fund of the NPS has been increased gradually, this large fund is concerned about depletion in the near future due to the unprecedented aging population and the low fertility rate. In this study, we have developed an asset-liability management (ALM) model that endogenizes variables which were regarded as being exogenous by including them in investable assets. We present the multistage stochastic programming (MSP) formulation incorporating the population structure as a variable that is new to ALM. The optimal portfolio encompassing the investment in raising the fertility rate is obtained. Extending the scope of ALM to social investment is a new approach that has not been attempted in other ALM studies. We demonstrate that socially driven investments can also be a good investment asset in which the NPS should consider to invest.
Highlights
The main function of a pension plan is to provide a stable life to pensioners; according to the National Pension Actuarial Projection conducted in 2018 [1], it is expected that the Korean National Pension Service (NPS) will not be able to realize this major function in the future
We find the optimal portfolio decision of the NPS, including the investment in raising the fertility rate, by employing multistage stochastic programming (MSP)
Our results varied depending on the parameters and assumptions about the practical effect of population investment on the fertility rate, it should be highlighted that this paper provides a formulation that encompasses a concept new to the literature in asset-liability management (ALM)
Summary
The main function of a pension plan is to provide a stable life to pensioners; according to the National Pension Actuarial Projection conducted in 2018 [1], it is expected that the Korean National Pension Service (NPS) will not be able to realize this major function in the future. The accumulated amount of funds of the NPS will continue to grow until 2041, reaching a maximum of 1778 trillion KRW, which is estimated to be approximately 44% of the national gross domestic product (GDP). This high amount of funds will be exhausted by 2057. Owing to the rapid aging and low fertility rate, the working-age population will decrease, whereas the number of pension beneficiaries will increase. This change in population structure increases future liabilities in the national pension. It is not a problem confined to the NPS, as it can lead to social problems, such as a slowdown in economic growth and an increase in welfare budget expenditure, which can become substantial threats to the entire country
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