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Benchmark-driven investment for DC pension plans

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  • Pelsser, Antoon
  • Yang, Li

Abstract

We investigate whether a benchmark and non-constant risk aversion affect the probability density distribution of optimal wealth at retirement. We maximize the expected utility of the ratio of pension wealth at retirement to an inflation-indexed benchmark. Together with a threshold and a lower bound, we are able to generate closed-form solutions. We find that this non-constant risk aversion type of utility could shift the probability density distribution of optimal wealth more towards the benchmark, and that the probability of achieving a certain percentage of the desired benchmark could be increased. The probability density distribution generated under constant relative risk aversion (CRRA) risk preference is more widely spread along the benchmark.

Suggested Citation

  • Pelsser, Antoon & Yang, Li, 2024. "Benchmark-driven investment for DC pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 23(4), pages 476-503, October.
    • Handle: RePEc:cup:jpenef:v:23:y:2024:i:4:p:476-503_2
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