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Optimal Design of the Attribution of Pension Fund Performance to Employees

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  • Heinz Müller
  • David Schiess

Abstract

type="main" xml:lang="en"> The article analyzes risk sharing in a defined contribution pension fund in continuous time. According to a prespecified attribution scheme, the interest rate paid on the employees' accounts is a linear function of the fund's investment performance. For each attribution scheme, the pension fund maximizes the expected utility and the employees derive utility from their savings accounts. It turns out that all Pareto-optimal attribution schemes are characterized by the same optimal participation rate. We derive the total welfare gain that installs from replacing no participation with optimal participation. This welfare gain can be quantified and is substantial for reasonable parameter values.

Suggested Citation

  • Heinz Müller & David Schiess, 2014. "Optimal Design of the Attribution of Pension Fund Performance to Employees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(2), pages 431-468, June.
    • Handle: RePEc:bla:jrinsu:v:81:y:2014:i:2:p:431-468
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