Defined Contribution Pension Fund Research Articles

The defined contribution pension plan after retirement under the criterion of a revised loss considering the economic situation

<abstract> <p>Considering the economic situation, we investigate the optimal asset allocation of defined contribution pension funds with random payouts after retirement under a modified criterion of quadratic loss. The HJB equation is derived adhering to the dynamic programming principle, and the time-consistent optimal investment strategy is designed based on the calculus theory. Finally, under two different risk attitudes, namely surplus preference and risk aversion, the impact of key parameters on the optimal investment strategy and the function of minimum loss at the initial moment is compared and analyzed, the economic significance is demonstrated, and the rationality of the model is verified.</p> </abstract>

A Genetic Algorithm Approach to Optimal Asset Allocation of Defined Contribution Pension Funds: Evidence From India’s National Pension System

Life cycle asset allocation has recently gained popularity and is the default option in pension funds worldwide. A line of recent studies has refuted its glory and argues that a balanced fund with a fixed allocation throughout the investment horizon may yield better results. The question arises from these studies: What should be the balanced fund’s optimum asset allocation weight? Therefore, the present study uses Genetic Algorithm to obtain the optimum asset allocation weight for India’s defined contribution pension plan subscribers. To validate our result, the study compares the results of a Genetic Algorithm to the outcomes of widely used asset allocation techniques, notably the life cycle and equally weighted strategies. This study holds important policy implications as, given the size of the pension asset and the long investment duration, even a trivial increase in return will substantially impact investment outcomes, affecting the subscribers’ well-being in old age.

A Guaranteed-Return Structured Product as an Investment Risk-Hedging Instrument in Pension Savings Plans

This study proposes a structured product (SP) for hedging defined contribution pension fund members against capital market risk. Using Monte Carlo simulations on three different guaranteed returns to test the investment strategy of the SP against a balanced investment portfolio, we measure their performance across a wide variety of capital market returns and risk scenarios. The results show that the SP guarantees a minimal return on the pension savings portfolio and offers a higher portfolio return at a lower investment risk, compared with the balanced investment portfolio. We conclude that the SP may become popular among pension fund members, potentially leading to improved risk management, greater competition, and investment strategy innovations for defined contribution pension schemes.

Robust optimal investment strategy for a DC pension plan in the market with mispricing and constant elasticity of variance

This paper considers an optimal asset allocation problem for a defined contribution pension fund in a continuous time setting, and the manager is concerned about potential model misspecification. We suppose that the financial market consists of one risk-free asset, one market index fund whose price satisfies the constant elasticity of variance model, and a pair of risky assets with mispricing. Under the objective of maximizing the expected utility of the pension fund wealth at the retirement, the closed form expressions of the robust optimal investment strategy and the corresponding value function are obtained by using the stochastic control theory. Finally, some numerical examples are given to compare the difference between the ambiguity averse and the ambiguity neutral strategies, and to investigate the effect of relevant parameters on the strategy. We find that the optimal investment strategy is not a long-short symmetric strategy when the mispricing assets have different mispricing correct capability, and it will lead to significant utility loss for the manager if the model uncertainty risk is ignored.

Equilibrium investment strategy for multi-period DC pension funds with stochastic interest rate and regime switching

This paper studies the equilibrium investment strategy for multi-period defined contribution (DC) pension funds under the mean-variance criterion. We assume that the financial market consists of one risk-free asset and multiple risky assets, the interest rate is stochastic and characterized by the discrete-time Ho-Lee model, and the interest rate as well as the returns of the risky assets both depend on the market states, the evolution of the market states is described by a Markov chain. We regard this problem as a non-cooperative game whose equilibrium strategy is a time-consistent strategy, and derive the analytical expressions for the equilibrium strategy, the equilibrium value function and the equilibrium efficient frontier by using the extended Bellman equation and the matrix representation technique. Finally, a numerical example based on real data from the UK market is provided to shed light on the theoretical results established in this paper.

Optimal portfolios for the DC pension fund with mispricing under the HARA utility framework

<p style='text-indent:20px;'>This paper studies the optimal portfolio selection for defined contribution (DC) pension fund with mispricing. We adopt the general hyperbolic absolute risk averse (HARA) utility to describe the risk performance of the pension fund managers. The financial market comprises a risk-free asset, a pair of mispriced stocks, and the market index. Using the dynamic programming approach, we construct the Hamilton-Jacobi-Bellman (HJB) equation and obtain the explicit expressions for optimal portfolio choices with two methods. Finally, numerical analysis is presented to illustrate the sensitivity of the optimal portfolios to parameters of the financial market and contribution process. <b>200</b> words.</p>

Optimal Pension Fund Management with Foreign Investment in a Stochastic Environment

To ensure the success of a pension plan under a self-contained defined contribution (DC) retirement plan, the inclusion of foreign assets in a local pension portfolio could be beneficial for risk diversification and the efficient improvement of a fund’s investment performance during its accumulation phase. This study focuses on developing international asset allocation criteria for a DC pension plan; accordingly, we consider risk exposure relative to stochastic interest rates and ex- change rates with minimum guarantees. An arbitrage-free framework, namely, the cross-currency Heath–Jarrow–Morton interest rate model, is introduced in dynamic optimization programming for the DC pension fund. The proposed solution based on the generalized stochastic framework provides tractable and appropriate criteria for the dynamic allocation of a DC pension fund. The constituents of the optimal solution can reflect changes in investment lifecycles and shifts in risk preferences during the accumulation phase of a DC pension plan.

Investment Strategy and Financial Performance of Defined Contribution Pension Funds in Kenya

Pension funds are meant to enable pensioners to live quality life upon retirement by paying them retirement benefits. Financial performance of defined contribution pension funds in Kenya has continued to portray unimpressive trend despite positive targets set by the pension funds. Hence, the study examined the effect of investment strategy on financial performance of defined contribution pension funds in Kenya. Systems theory view of pension funds, agency theory, portfolio theory and fisher’s theory of investment guided this study. Secondary data was used in the study. Correlational research design and positivism research philosophy were adopted by this study. The target population comprised of 1172 registered defined contribution pension funds in Kenya as of December 2018. A sample size of 289 defined contribution pension funds were involved in the study and were selected by applying stratified random sampling method. The study established that a positive association exists between investment strategy and financial performance of defined contribution pension funds in Kenya. It concluded that investment strategy explained up to 57.76% of the variations in the return on investment. The regression analysis conducted found a significantly positive association between long term investments and return on investment. Medium term investments was also found to be positively and significantly connected to return on investment. There was also a significantly positive relationship between short term investments and return on investment. Alternative investments was found to be positively and significantly connected to return on investment. The coefficient of determination increased from 57.76% to 65.47% when density of contributions interacted with long term investments, medium term investments, short term investments and alternative investments. The study recommended long term investments as the most ideal investment option for defined contribution pension funds because of its ability to generate the highest return on investment. Medium term investments was recommended as the second best investment option to be embraced by defined contribution pension funds because of its ability to yield good returns as well, second to long term investments. The next investment priority should be given to the alternative investments since it had the third highest regression of coefficients. The least investment option to be undertaken by defined contribution pension funds should be short term investments. Keywords: Long term investments, medium term investments, short term investments, alternative investments, density of contribution, performance, defined contribution pension funds, Kenya.

Optimal investment strategy for a DC pension fund plan in a finite horizon time: an optimal stochastic control approach

AbstractThis paper obtains an optimal strategy in a finite horizon time for a portfolio of a defined contribution (DC) pension fund for an investor with the CRRA utility function. It employs the optimal stochastic control method in a financial market with two different asset markets, one risk-free and another one risky asset in which its jump follows either by a finite or infinite activity Lévy process. Sensitivity of jump parameters in an uncertainty financial market has been studied.

Can defined contribution pensions survive the pandemic? The Chilean case

AbstractThe impact of the COVID‐19 pandemic threatens the viability of Chile’s defined contribution (DC) pension system, undermining its financial foundation and exposing its vulnerability to political risk. The COVID‐19 crisis led to the approval of three rounds of emergency withdrawals of 10 per cent of pension savings (as of April 2021). Utilizing pension funds during an economic crisis is neither new nor uncommon – during the Great Recession, several countries in Central and Eastern Europe diverted DC pension funds to cope with the fiscal stresses. As Chile prepares to draft a new constitution, debates about the efficiency and equity of the pension system are ongoing. In this regard, and as the political response to the pandemic demonstrates, the DC system has failed to live up to its promise of ending political risk and preventing the diversion of pension funds for other expenditures.

Optimal management of defined contribution pension funds under the effect of inflation, mortality and uncertainty

In the present work, we study the problem of optimal management of defined contribution pension funds, during the distribution phase, under the effect of inflation, mortality and model uncertainty. More precisely, we consider a class of employees, who, at the time of retirement, enter a life assurance contract with the same insurance firm. The fund manager of the firm collects the entry fees to a portfolio savings account and this wealth is to be invested optimally in a Black–Scholes type financial market. As such schemes usually last for many years, we extend our framework, by: (i) augmenting the financial market with an inflation-adjusted bond, and, (ii) taking into account mortality of the fund members. Model uncertainty aspects are introduced as the fund manager does not fully trust the model he/she faces. By resorting to robust control and dynamic programming techniques, we provide: (a) closed-form solutions for the case of the exponential utility function, (b) a detailed study of the qualitative features of the problem at hand that elucidates the effect of robustness and inflation on the optimal investment decisions.

확정기여(DC)형 퇴직연금 투자 시뮬레이션 경험이 DC형 가입자의 적립금 관리태도에 미치는 영향

확정기여(DC)형 퇴직연금 투자 시뮬레이션 경험이 DC형 가입자의 적립금 관리태도에 미치는 영향

Dynamic discrete-time portfolio selection for defined contribution pension funds with inflation risk

<p style='text-indent:20px;'>This paper investigates a multi-period asset allocation problem for a defined contribution (DC) pension fund facing stochastic inflation under the Markowitz mean-variance criterion. The stochastic inflation rate is described by a discrete-time version of the Ornstein-Uhlenbeck process. To the best of our knowledge, the literature along the line of dynamic portfolio selection under inflation is dominated by continuous-time models. This paper is the first work to investigate the problem in a discrete-time setting. Using the techniques of state variable transformation, matrix theory, and dynamic programming, we derive the analytical expressions for the efficient investment strategy and the efficient frontier. Moreover, our model's exceptional cases are discussed, indicating that our theoretical results are consistent with the existing literature. Finally, the results established are tested through empirical studies based on Australia's data, where there is a typical DC pension system. The impacts of inflation, investment horizon, estimation error, and superannuation guarantee rate on the efficient frontier are illustrated.</p>

PORTFOLIO INSURANCE STRATEGIES FOR A TARGET ANNUITIZATION FUND

AbstractThe transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies for DC pension funds focusing on retirement income targets. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member’s age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy generally leads to higher accumulated savings at retirement, whereas the constant proportion strategy provides better downside risk protection robust to equity market jumps/volatilities.

On the Stochastic Optimal Control Model of the Investments of Defined Contribution (DC) Pension Funds

One of the major problems faced in the management of pension funds and plan is how to allocate and control the future flow of contribution likewise the proportion of portfolio value and investments in risky assets. In this work, optimal investment for a stochastic model of a Defined contribution (DC) is investigated such that the model design is analysed yielding an optimized expected utility of the members’ terminal wealth. An optimized solution is derived using the Hamilton Jacobi equation in solving the problem of investment strategy formulated by Constant absolute risk aversion (CARA). However, to consider the changes that occur in the dimension of optimal solutions in optimization problems, mostly, the optimal behaviour of parameters, the sensitivity analysis is considered. Thus, the analysis of the model is carried out herein by utilising the approach of the sensitivity analysis of parameters. This is carried out by using Maple software and varying the values of some model parameters such that the behaviour of each parameter relating to the pension funds invested in the risky assets is determined. The results are presented graphically and using tables thus discussed such that pension investors and stakeholders are advised.
 Keywords: Stochastic; DC Pension funds; Sensitivity analysis; Hamilton-Jacobi-Bellman equation; Optimal investment

확정기여(Dc)형 퇴직연금 투자 시뮬레이션 경험이 Dc형 가입자의 적립금 관리태도에 미치는 영향 (Effects of Experience in Investment Simulations on Subscribers’ Management Attitude of Defined Contribution Pension Funds)

Korean Abstract: 본 연구는 저금리 기조의 지속으로 확정기여(DC)형 퇴직연금 가입자가 증가하고 있는 상황에서 근로자들이 자신의 노후를 위한 적립금을 좀 더 적극적으로 관리할 수 있도록 적립금 관리에 필요한 태도를 함양할 수 있는 방안을 제시하기 위해 투자 시뮬레이션 경험이 적립금 관리태도에 미치는 영향을 살펴보고자 하였다. 이를 위해 DC형 퇴직연금 에 가입하고 있는 30~50대의 상용직 임금근로자 468명을 대상으로 설문조사를 실시하 였으며, 연구결과는 다음과 같다. 첫째, DC형 퇴직연금 가입자의 가입현황 및 적립금 관리행동을 분석한 결과, 가입자 중 상당수가 본인이 스스로 책임져야 하는 퇴직연금의 핵심 내용조차 알지 못하는 것으 로 나타났다. 투자상품을 1년에 한 번도 변경하지 않는다는 응답이 74.4%에 달해 가입 자 4명 중 3명은 적립금을 관리하지 않고 사실상 방치하는 실정이었다. 둘째, 탐색적 요 인분석을 통해 적립금 관리태도의 네 가지 구성요인과 측정 문항을 정리하고 이를 활용 해 DC형 가입자들의 적립금 관리태도 수준을 파악한 결과, 적립금 관리태도 종합 점수 (만점 50점)가 평균 36.16점(표준편차 5.22점)으로 나타났다. 100점 만점 점수로 환산한 구성요인별 점수는 적립금 관리방법 이해의 필요성 인식 점수가 79.04점으로 가장 높았 고 적립금 관리에 대한 감정 점수가 56.08점으로 가장 낮았다. 셋째, 투자 시뮬레이션이 DC형 퇴직연금 가입자의 적립금 관리태도 구성요인 중 적립금 관리방법 이해의 필요성 인식에 통계적으로 유의미한 영향을 미친다는 사실을 확인하였는데 이는 투자 시뮬레이 션이 적립금 관리태도를 함양하는 효과적인 도구가 될 수 있음을 시사한다. English Abstract: This study tried to examine the effects of investment simulation experience on Defined Contribution (DC) retirement pension subscribers’ management attitude of reserves in order to present a plan which cultivates the attitude necessary for reserve fund management so that workers can more actively manage reserves for their retirement. A survey was conducted on 468 regular wage workers in their 30s to 50s who are enrolled in the DC retirement pension. The analysis results and conclusions are as follows. First, as a result of analyzing the subscription status and management behavior of DC retirement pension subscribers, it was found that many of the subscribers did not even know the core contents of the retirement pension that they are responsible for themselves. As 74.4% of the respondents said they did not change their investment products once a year, three out of every four subscribers did not manage their reserves and virtually neglected them. Second, through exploratory factor analysis, the four components and measurement questions of the reserve management attitude were summarized, and as a result of grasping the level of reserve management attitude of DC subscribers, the average of the overall reserve management attitude score was 36.16 points out of a possible 100. As for the score for each component, the recognition score for the need to understand how to manage reserves was the highest with 79.04 points, and the emotion score for the management of reserves was the lowest with 56.08 points. Third, it has been confirmed that investment simulation has a statistically significant effect on the recognition of the need to understand how to manage reserves among the components of the reserve management attitude of DC retirement pension subscribers, indicating that investment simulation can be an effective tool for cultivating the reserve management attitude.

PENSION FUND RESTORATION POLICY IN GENERAL EQUILIBRIUM

When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate inflation-indexed or non-indexed benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution (DC)) or changing the pension fund contribution rate on labor income (Defined Benefit (DB)). Economies with DC pension funds respond similarly to adverse capital quality shocks as economies without pension funds. DB pension funds, however, distort labor supply decisions and exacerbate economic fluctuations. While DB pension funds achieve intergenerational risk-sharing, welfare analyses indicate that the negative effects of the induced distortions are sizeable.

Management strategies for a defined contribution pension fund under the hybrid stochastic volatility model

In this paper, we introduce the Heston–Hull–White (the hybrid) model in the pension fund management. The optimal investment and benefit payments policies for the DC pension fund with an income drawdown option are presented explicitly. In this study, the pension fund manager is allowed to invest the fund wealth in riskless and risky assets. The risk asset price dynamics evolve according to the Hybrid Stochastic Volatility (Heston–Hull–White) model. The goal of the pension fund manager is to maintain the standard of lives for the pension fund members after retirement. We derived the HJB equation and established the closed-form solution for the optimal control policies using stochastic dynamic programming principle. To illustrate the economic implications of the model, we provide a numerical example and simulations. The results reveal that the optimal investment and benefit payments strategies convergence successful with time t. The risk asset price volatility and interest rate mean reversion are inversely proportional to investment policy. The interest rate volatility and risk preference are both directly proportional to investment and benefit payments. The pension fund managers are advised to control the investment and the benefit payments policies to achieve the goals of the pension fund members.

Dynamic mean-variance problem for defined contribution pension fund under inflation

This paper studies the optimal investment strategy for a mean-variance problem of a defined contribution (DC) pension plan during the accumulation phase.Generally, the time horizon of DC pension management is really long, and thus the real wealth process, instead of the nominal process is derived with the consideration of inflation. The inflation index is described by a jump-diffusion process. The plan aims to minimize the risk measured by variance, by investing the wealth in a financial market consisting of a bank account, an inflation-indexed bond and a risky asset. The dynamic of the risky asset is also subjected to a Poisson jump and a Brownian uncertainty. The closed-form optimal investment decision and the efficient frontier are derived by solving the corresponding Hamilton-Jacobi-Bellman (HJB) equation.

Optimal investment of DC pension plan under short-selling constraints and portfolio insurance

In this paper we investigate an optimal investment problem under short-selling and portfolio insurance constraints faced by a defined contribution pension fund manager who is loss averse. The financial market consists of a cash bond, an indexed bond and a stock. The manager aims to maximize the expected S-shaped utility of the terminal wealth exceeding a minimum guarantee. We apply the dual control method to solve the problem and derive the representations of the optimal wealth process and trading strategies in terms of the dual controlled process and the dual value function. We also perform some numerical tests and show how the S-shaped utility, the short-selling constraints and the portfolio insurance impact the optimal terminal wealth.