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Pension funds as institutions for intertemporal risk transfer

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  • Baumann, Roger T.
  • Müller, Heinz H.
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    Abstract

    A continuous time overlapping generation model is used to analyse defined-contribution pension plans. Without intergenerational risk transfer between employees the optimal investment strategy results from the Merton model. Introducing intergenerational risk transfer leads to an increase in the risk tolerance of future employees and allows us to improve their anticipated expected utility resulting from accrued retirement benefits. Of course, this leads to a risk of temporary underfunding. But even for an underfunded pension plan one can guarantee that in the long run, the median of the funding ratio exceeds one.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 42 (2008)
    Issue (Month): 3 (June)
    Pages: 1000-1012

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    Handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:1000-1012

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    Web page: http://www.elsevier.com/locate/inca/505554

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    1. Deelstra, Griselda & Grasselli, Martino & Koehl, Pierre-Francois, 2004. "Optimal design of the guarantee for defined contribution funds," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(11), pages 2239-2260, October.
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    8. Leippold, Markus & Trojani, Fabio & Vanini, Paolo, 2004. "A geometric approach to multiperiod mean variance optimization of assets and liabilities," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(6), pages 1079-1113, March.
    9. Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
    10. Battocchio, Paolo & Menoncin, Francesco, 2004. "Optimal pension management in a stochastic framework," Insurance: Mathematics and Economics, Elsevier, vol. 34(1), pages 79-95, February.
    11. Griselda Deelstra & Martino Grasselli & Pierre-François Koehl, 2003. "Optimal investment strategies in the presence of a minimum guarantee," ULB Institutional Repository 2013/7598, ULB -- Universite Libre de Bruxelles.
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