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The optimal cyclical design for a target benefit pension plan

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  • Chen, Lv
  • Li, Danping
  • Wang, Yumin
  • Zhu, Xiaobai

Abstract

In this paper, we derive the optimal cyclical design of a target benefit (TB) pension plan that balances the sustainability and the benefit stability using the optimal control approach. The optimal design possesses a linear risk sharing structure with cyclical parameters. We observe that the optimal design should be pro-cyclical in the usual circumstances, but counter-cyclical when the pension plan is severely in deficit. We compare the TB plans with the defined benefit plans and conclude that a more aggressive investment strategy should be adopted for the TB plans. In the end, we provide a cautionary note on the optimal control approach in the study of the TB plans.

Suggested Citation

  • Chen, Lv & Li, Danping & Wang, Yumin & Zhu, Xiaobai, 2023. "The optimal cyclical design for a target benefit pension plan," Journal of Pension Economics and Finance, Cambridge University Press, vol. 22(3), pages 284-303, July.
    • Handle: RePEc:cup:jpenef:v:22:y:2023:i:3:p:284-303_2
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