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

I. Baltas, L. Dopierala, K. Kolodziejczyk, M. Szczepański, G.-W. Weber and A.N. Yannacopoulos

European Journal of Operational Research, 2022, vol. 298, issue 3, 1162-1174

Abstract: 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.

Keywords: Dynamic programming; Robust control; Pension funds management; Inflation risk; Gompertz law of mortality (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ejor.2021.08.038

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Handle: RePEc:eee:ejores:v:298:y:2022:i:3:p:1162-1174