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Abstract
This paper aim at studying a mean-variance portfolio selection problem with stochastic salary, proportional administrative costs and taxation in the accumulation phase of a defined contribution (DC) pension scheme. The fund process is subjected to taxation while the contribution of the pension plan member (PPM) is tax exempt. It is assumed that the flow of contributions of a PPM are invested into a market that is characterized by a cash account and a stock. The optimal portfolio processes and expected wealth for the PPM are established. The efficient and parabolic frontiers of a PPM portfolios in mean-variance are obtained. It was found that capital market line can be attained when initial fund and the contribution rate are zero. It was also found that the optimal portfolio process involved an inter-temporal hedging term that will offset any shocks to the stochastic salary of the PPM.
Highlights
The problem of international Pay As You Go public pension scheme is making individuals public, corporate bodies and governments of many countries of the ISSN 2310-5070 ISSN 2311-004XCopyright ⃝c 2014 International Academic PressCHARLES I
Defined contribution pension schemes will play a prominent role in increasing the wealth of the nation and that of the plan members, since it is designed and tailored towards the members needs by ensuring that members make their input in the day-to-day management of the scheme
In the context of defined contribution (DC) pension plans, the problem of finding the optimal investment strategy with stochastic salary, proportional administrative costs and taxation on fund process under mean-variance efficient approach has not been reported in any published articles. [12, 21] assumed a constant flow of contributions into the pension scheme
Summary
The problem of international Pay As You Go public pension scheme is making individuals public, corporate bodies and governments of many countries of the. In the context of DC pension plans, the problem of finding the optimal investment strategy with stochastic salary, proportional administrative costs and taxation on fund process under mean-variance efficient approach has not been reported in any published articles. We study a mean-variance approach to portfolio selection problem with stochastic salary of a PPM in accumulation phase of a DC pension scheme using quadratic utility function. Nkeki (2012) considered a mean-variance portfolio selection problem with inflation hedging strategy for a defined contributory pension scheme. Related to this article is a paper by [18], who studied a mean-variance portfolio selection problem with stochastic salary and inflation protection strategy in the accumulation phase of a DC pension plan.
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