The optimal cyclical design for a target benefit pension plan

Lv Chen, Danping Li, Yumin Wang and Xiaobai Zhu

Journal of Pension Economics and Finance, 2023, vol. 22, issue 3, 284-303

Abstract: In this paper, we derive the optimal cyclical design of a target benefit (TB) pension plan that balances the sustainability and the benefit stability using the optimal control approach. The optimal design possesses a linear risk sharing structure with cyclical parameters. We observe that the optimal design should be pro-cyclical in the usual circumstances, but counter-cyclical when the pension plan is severely in deficit. We compare the TB plans with the defined benefit plans and conclude that a more aggressive investment strategy should be adopted for the TB plans. In the end, we provide a cautionary note on the optimal control approach in the study of the TB plans.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jpenef:v:22:y:2023:i:3:p:284-303_2

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