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OR PRACTICE---Assisting Defined-Benefit Pension Plans


  • John M. Mulvey

    () (Department of Operations Research and Financial Engineering, Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08544)

  • Koray D. Simsek

    () (Faculty of Management, Sabanci University, Orhanli, 34956 Tuzla, Istanbul, Turkey)

  • Zhuojuan Zhang

    () (BlackRock Financial Management Inc., New York, New York 10055)

  • Frank J. Fabozzi

    () (School of Management, Yale University, New Haven, Connecticut 06511)

  • William R. Pauling

    () (Hartford Investment Management, Hartford, Connecticut 06105)


The defined-benefit pension system poses substantial, long-term risks for the U.S. economy. We describe a flexible asset-liability management (ALM) system for pension planning. The primary goals are to improve the performance and survivability of the pension trust. We first employ a stochastic program for enhancing investment strategies in light of company and other goals and pension risk constraints. The results are linked with a policy simulator for further analysis. We illustrate the concepts via two disparate real-world companies. The first is a slowly growing auto company, and the second a profitable pharmaceutical enterprise. We show that a stochastic program can help in the process of discovering sound policy rules. The ALM system has been employed extensively throughout the world by a large global actuarial firm.

Suggested Citation

  • John M. Mulvey & Koray D. Simsek & Zhuojuan Zhang & Frank J. Fabozzi & William R. Pauling, 2008. "OR PRACTICE---Assisting Defined-Benefit Pension Plans," Operations Research, INFORMS, vol. 56(5), pages 1066-1078, October.
  • Handle: RePEc:inm:oropre:v:56:y:2008:i:5:p:1066-1078

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    References listed on IDEAS

    1. Kouwenberg, Roy, 2001. "Scenario generation and stochastic programming models for asset liability management," European Journal of Operational Research, Elsevier, vol. 134(2), pages 279-292, October.
    2. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters,in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
    3. repec:cup:cbooks:9780521571876 is not listed on IDEAS
    4. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    5. David R. Cariño & Terry Kent & David H. Myers & Celine Stacy & Mike Sylvanus & Andrew L. Turner & Kouji Watanabe & William T. Ziemba, 1994. "The Russell-Yasuda Kasai Model: An Asset/Liability Model for a Japanese Insurance Company Using Multistage Stochastic Programming," Interfaces, INFORMS, vol. 24(1), pages 29-49, February.
    6. Kjetil Høyland & Stein W. Wallace, 2001. "Generating Scenario Trees for Multistage Decision Problems," Management Science, INFORMS, vol. 47(2), pages 295-307, February.
    7. Francesco Franzoni & José M. Marín, 2006. "Pension Plan Funding and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 61(2), pages 921-956, April.
    8. John M. Mulvey & Gordon Gould & Clive Morgan, 2000. "An Asset and Liability Management System for Towers Perrin-Tillinghast," Interfaces, INFORMS, vol. 30(1), pages 96-114, February.
    9. John M. Mulvey, 1996. "Generating Scenarios for the Towers Perrin Investment System," Interfaces, INFORMS, vol. 26(2), pages 1-15, April.
    10. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, February.
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    Cited by:

    1. Hong‐Chih Huang, 2010. "Optimal Multiperiod Asset Allocation: Matching Assets to Liabilities in a Discrete Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 451-472, June.
    2. Agnieszka Karolina Konicz & David Pisinger & Alex Weissensteiner, 2016. "Optimal retirement planning with a focus on single and joint life annuities," Quantitative Finance, Taylor & Francis Journals, vol. 16(2), pages 275-295, February.
    3. repec:eee:ejores:v:274:y:2019:i:3:p:1102-1111 is not listed on IDEAS
    4. Willem Klein Haneveld & Matthijs Streutker & Maarten Vlerk, 2010. "An ALM model for pension funds using integrated chance constraints," Annals of Operations Research, Springer, vol. 177(1), pages 47-62, June.


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