The Impact of Longevity Risk on the Optimal Contribution Rate and Asset Allocation for Defined Contribution Pension Plans

Sharon S Yang () and Hong-Chih Huang ()
Additional contact information
Sharon S Yang: Department of Finance, National Central University, 300 Road, Tao-Yuan, Taiwan.
Hong-Chih Huang: Department of Risk Management and Insurance, National Cheng Chi University, 64, Section 2, Chi-Nan Road, Taipei, Taiwan.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2009, vol. 34, issue 4, 660-681

Abstract: This research studies the interaction between longevity risk and asset allocation for a defined contribution pension plan. We investigate the investment strategy during the accumulation phase to deal with longevity risk during the decumulation phase. The longevity risk is demonstrated using the U.K. mortality experience for pensioners. We experiment with three patterns of mortality: base, projection and stochastic mortality rates. The optimal asset allocation and contribution rate are determined by minimizing the variance of the error between the value of pension fund and required pension fund plus the square of the expected value of the error. The required pension fund is decided by the pension fund target, measured using the income replacement ratio. We consider four assets in the asset allocation and observe four types of changes to the rebalancing investment strategies. The results show a life cycle investment strategy and indicate that longevity risk can be hedged by either raising the contribution rate or setting a more aggressive asset allocation.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.palgrave-journals.com/gpp/journal/v34/n4/pdf/gpp200918a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/gpp/journal/v34/n4/full/gpp200918a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:gpprii:v:34:y:2009:i:4:p:660-681

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41288/PS2

Access Statistics for this article

The Geneva Papers on Risk and Insurance - Issues and Practice is currently edited by Christophe Courbage

More articles in The Geneva Papers on Risk and Insurance - Issues and Practice from Palgrave Macmillan, The Geneva Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().