Optimal Replacement and Investment Strategy in a Defined Benefit Pension Plan with Cyclically Changing Economic Environment

Hong Mao and Zhongkai Wen

Journal of Insurance Issues, 2021, vol. 44, issue 1, 65-89

Abstract: In this article, we study a defined benefit plan and use stochastic processes to model the plan. We use the Vasicek model to describe the return rates of multi-riskasset investment and the growth rate of wages, and we put time-varying correlations among them into consideration. We also consider stochastic mortality in the pension plan. We minimize the expected shortfall per unit of cumulative wealth and obtain an optimal replacement rate and investment strategy. Our numerical analyses show that a higher contribution rate corresponds to a higher optimal replacement rate. Mortality can affect greatly the design of pension plans. Therefore, mortality is an important factor in optimal designs of pension plans.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:wri:journl:v:44:y:2021:i:1:p:65-89

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