The innovest Austrian pension fund planning model InnoALM

Alois Geyer and William T. Ziemba

Chapter 28 in Handbook of the Fundamentals of Financial Decision Making:In 2 Parts, 2013, pp 491-504 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper describes the financial planning model TnnoALM we developed at Innovest for the Austrian pension fund of the electronics firm Siemens. The model uses a multi period stochastic linear programming framework with a flexible number of time periods of varying length. Uncertainty is modeled using multiperiod discrete probability scenarios for random return and other model parameters. The correlations across asset classes, of bonds. stocks. cash. and other financial instruments. are state dependent using multiple correlation matrices that correspond to differing market conditions. This feature allows lnnoALM to anticipate and react to severe as well as normal market conditions. Austrian pension law and policy considerations can be modeled as constraints in the optimization. The concave risk-averse preference function is to maximize the expected present value of terminal wealth at the specified horizon net of expected discounted convex (piecewise-linear) penalty costs for wealth and benchmark targets in each decision period. lnnoALM has a user interface that provides visualization of key model outputs, the effect of input changes, growing pension benefits from increased deterministic wealth target violations. stochastic benchmark targets, security reserves. policy changes, etc. The solution process using the IBM OSL stochastic programming code is fast enough to generate virtually online decisions and results and allows for easy interaction of the user with the model to improve pension fund performance. The model has been used since 2000 for Siemens Australia, Siemens worldwide. and to evaluate possible pension fund regulation changes in Austria.

Keywords: Financial Decision Making; Asset Pricing; Prospect Theory; Utility Theory; Risk Aversion; Static Portfolio Theory; Stochastic Dominance; Dynamic Modeling; Dynamic Portfolio Theory; Tactical Asset Allocation; Kelly Strategy; Capital Growth (search for similar items in EconPapers)
Date: 2013
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