Improving pension product design

Agnieszka Karolina Konicz, John M. Mulvey

    Research output: Chapter in Book/Report/Conference proceedingConference abstract in proceedingsResearchpeer-review

    Abstract

    Pension products characterized by linking an individual's savings directly to market returns represent the most popular, growing pension domain globally. These products are widely sold in contribution-defined pension schemes, labor market pensions, and individual schemes. However, available products are designed with a tendency to assume greater risk the longer it is until retirement, but are not adjusted to individual preferences and circumstances. This paper develops an optimal asset allocation strategy for a defined contribution plan by adjusting to individual needs, such that the expected utility of retirement benefits is maximized. An asset allocation strategy should not only depend on the plan member's age (or time left to retirement), nor only on her risk preferences, but should capture personal characteristics. Among other factors, we include current wealth, expected lifetime salary progression, expected social benefits, choice of assets, type of retirement distribution schedules, bequest motive and life insurance. The problem is solved via a model that combines two optimization technologies: stochastic control and multi-stage stochastic linear programming (SLP). As an example of an optimal pension product design, we present the operations research methods, which have potential to stimulate new thinking and add to actuarial practice.
    Original languageEnglish
    Title of host publicationConference Program and Book of Abstracts : 13th International Conference on Stochastic Programming
    Publication date2013
    Publication statusPublished - 2013
    Event13th International Conference on Stochastic Programming - Bergamo, Italy
    Duration: 8 Jul 201312 Jul 2013
    Conference number: 13
    http://dinamico2.unibg.it/icsp2013/

    Conference

    Conference13th International Conference on Stochastic Programming
    Number13
    CountryItaly
    CityBergamo
    Period08/07/201312/07/2013
    Internet address

    Cite this

    Konicz, A. K., & Mulvey, J. M. (2013). Improving pension product design. In Conference Program and Book of Abstracts : 13th International Conference on Stochastic Programming