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Optimal investment policies for defined benefit pension funds

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  • SIEGMANN, ARJEN

Abstract

This paper analyzes optimal investment policies for pension funds of a defined benefit (DB) type. The nature of a DB fund induces a natural modeling of preferences being of the mean-downside risk type. With compensation for inflation as an explicit goal of a pension fund, a natural reference point for the risk measure is the future (indexed) value of the liabilities. Results are presented for different levels of inflation uncertainty and its correlation with stock returns. The optimal decision rules show increased risk-taking for funding ratios moving away from the discounted value of the reference point. Furthermore, it is shown that the outcomes are comparable with those using a mean-downside deviation criterion. We provide intuition for the results and compare the outcomes with actual investment policies of six large Dutch pension funds.

Suggested Citation

  • Siegmann, Arjen, 2007. "Optimal investment policies for defined benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(1), pages 1-20, March.
    • Handle: RePEc:cup:jpenef:v:6:y:2007:i:01:p:1-20_00
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    Cited by:

    1. Guohui Guan & Zongxia Liang & Yi Xia, 2023. "Optimal management of DB pension fund under both underfunded and overfunded cases," Papers 2302.08731, arXiv.org.
    2. Ines Fortin & Jaroslava Hlouskova, 2015. "Downside loss aversion: Winner or loser?," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 81(2), pages 181-233, April.
    3. Artem Dyachenko & Patrick Ley & Marc Oliver Rieger & Alexander F. Wagner, 2022. "The asset allocation of defined benefit pension plans: the role of sponsor contributions," Journal of Asset Management, Palgrave Macmillan, vol. 23(5), pages 376-389, September.
    4. Dormidontova, Yulia & Nazarov, Vladimir & A. Tikhonova, 2014. "Analysis of Approaches of Participants of Pension Products Market to the Development of Optimal Investment Strategies of Pension Savings," Published Papers r90227, Russian Presidential Academy of National Economy and Public Administration.

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