ON INTEGRATED CHANCE CONSTRAINTS IN ALM FOR PENSION FUNDS

Abstract

AbstractWe discuss the role ofintegrated chance constraints(ICC) as quantitative risk constraints in asset and liability management (ALM) for pension funds. We define two types of ICC: theone periodintegrated chance constraint (OICC) and themultiperiodintegrated chance constraint (MICC). As their names suggest, the OICC covers only one period, whereas several periods are taken into account with the MICC. A multistage stochastic linear programming model is therefore developed for this purpose and a special mention is paid to the modeling of the MICC. Based on a numerical example, we first analyze the effects of the OICC and the MICC on the optimal decisions (asset allocation and contribution rate) of a pension fund. By definition, the MICC is more restrictive and safer compared to the OICC. Second, we quantify this MICC safety increase. The results show that although the optimal decisions from the OICC and the MICC differ, the total costs are very close, showing that the MICC is definitely a better approach since it is more prudent.