Abstract

Journal of Actuarial Practice

Volume 10, Numbers 1 and 2, 2002

Dynamic Funding and Investment Strategy for Defined Benefit Pension Schemes: A Model Incorporating Asset-Liability Matching Criteria

Shih-Chieh Chang, Cheng-Hsien Tsai, Chia-Jung Tien, and Chang-Ye Tu

Abstract

This paper studies the dynamic funding policy and investment strategy for defined benefit pension plans using one of the most comprehensive dynamic pension models to date. The model includes three investable assets: one risk-free and two risky. The optimal plan decisions are formulated as a stochastic control problem that is solved using dynamic programming. The objective function uses performance measures to take into account the stability and solvency of the plan. The model is then applied to a Taiwanese pension.

Key words and phrases: optimal contribution, asset allocation, dynamic programming, performance measure.

Corresponding Author:

Shih-Chieh Chang

Department of Risk Management and Insurance

College of Commerce

National Chengchi University

64 Sec. 2 Chinan Rd,

Taipei

Taiwan R.O.C