Risk management for pension funds

Francesco Menoncin ()

Working Papers from University of Brescia, Department of Economics

Abstract: We take into account the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective mathematical reserve at the death time of a representative member. When both the interest rate and the market price of risk are deterministic, we are able to compute an explicit solution. In a simplified framework we demonstrate that this optimal portfolio is always less risky than the Merton’s (1969-1971) one. In particular, the asset allocation is less and less risky until the pension date while, after retirement of the fund’s member, it becomes riskier and riskier.

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