Adaptive Strategies for Pension Fund Management

Abstract

This paper proposes a simulation-based framework for assessing and improving the performance of a pension fund management scheme. This framework is modular and allows the definition of customized performance metrics that are used to assess and iteratively improve asset and liability management policies. We illustrate our framework with a simple implementation that showcases the power of including adaptable features. We show that it is possible to dissipate longevity and volatility risks by permitting adaptability in asset allocation and payout levels. The numerical results show that by including a small amount of flexibility, there can be a substantial reduction in the cost to run the pension plan as well as a substantial decrease in the probability of defaulting.

Figures (3)

• Figure 1: Schematic representation of the pension fund model.
• Figure 2: The penalty function $\eta(m)$ with steep penalties outside the acceptable and moderate penalties within it.
• Figure 3: Simulations of asset to liability ratio under the different plans.

Theorems & Definitions (1)

• Example 1: Example of rules for a pension plan