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Optimal investment in defined contribution pension schemes with forward utility preferences

Author

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  • Ng, Kenneth Tsz Hin
  • Chong, Wing Fung

Abstract

Optimal investment strategies of an individual worker during the accumulation phase in the defined contribution pension scheme have been well studied in the literature. Most of them adopted the classical backward model and approach, but any pre-specifications of retirement time, preferences, and market environment models do not often hold in such a prolonged horizon of the pension scheme. Pre-commitment to ensure the time-consistency of an optimal investment strategy derived from the backward model and approach leads the supposedly optimal strategy to be sub-optimal in the actual realizations. This paper revisits the optimal investment problem for the worker during the accumulation phase in the defined contribution pension scheme, via the forward preferences, in which an environment-adapting strategy is able to hold optimality and time-consistency together. Stochastic partial differential equation representation for the worker's forward preferences is illustrated. This paper constructs two of the forward utility preferences and solves the corresponding optimal investment strategies, in the cases of initial power and exponential utility functions.

Suggested Citation

  • Ng, Kenneth Tsz Hin & Chong, Wing Fung, 2024. "Optimal investment in defined contribution pension schemes with forward utility preferences," Insurance: Mathematics and Economics, Elsevier, vol. 114(C), pages 192-211.
    • Handle: RePEc:eee:insuma:v:114:y:2024:i:c:p:192-211
    DOI: 10.1016/j.insmatheco.2023.12.001
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    More about this item

    Keywords

    Optimal investment; Defined contribution pension scheme; Forward utility preferences; Pre-commitment resolution; Exogenous baseline strategy;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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