Hedging longevity risk in defined contribution pension schemes

Ankush Agarwal, Christian-Oliver Ewald and Yongjie Wang

Papers from arXiv.org

Abstract: Pension schemes all over the world are under increasing pressure to efficiently hedge the longevity risk posed by ageing populations. In this work, we study an optimal investment problem for a defined contribution pension scheme which decides to hedge the longevity risk using a mortality-linked security, typically a longevity bond. The pension scheme invests in the risky assets available in the market, including the longevity bond, by using the contributions from a representative scheme member to ensure a minimum guarantee such that the member is able to purchase a lifetime annuity upon retirement. We transform this constrained optimal investment problem into an unconstrained problem by replicating a self-financing portfolio of future contributions from the member and the minimum guarantee provided by the scheme. We solve the resulting optimisation problem using the dynamic programming principle and through a series of numerical studies reveal that the longevity risk has an important impact on the performance of investment strategies. Our results provide mathematical evidence supporting the use of mortality-linked securities for efficient hedging of the longevity risk.

Date: 2019-04, Revised 2020-05
New Economics Papers: this item is included in nep-age, nep-rmg and nep-upt
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http://arxiv.org/pdf/1904.10229 Latest version (application/pdf)

Related works:
Journal Article: Hedging longevity risk in defined contribution pension schemes (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1904.10229

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