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

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.