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In this paper, we study optimal asset allocation strategy for a defined contribution (DC) pension fund with return of premium clause under Heston’s volatility model in mean-variance utility frame work. In this model, members’ next of kin are allowed to withdraw their family members’ accumulated premium with predetermined interest. Also, investments in one risk free asset and one risky asset are considered to help increase the accumulated funds of the remaining members in order to meet their retirement needs. Using the actuarial symbol, we formulize the problem as a continuous time mean-variance stochastic optimal control problem. We establish an optimization problem from the extended Hamilton Jacobi Bellman equations using the game theoretic approach and solve the optimization problem to obtain the optimal allocation strategy for the two assets, the optimal fund size and also the efficient frontier of the pension members. We analyze numerically the effect of some parameters on the optimal allocation strategy and deduce that as the initial wealth, predetermined interest rate and risk averse level increases, the optimal allocation policy for the risky asset (equity) decreases. Furthermore, we give a theoretical comparison of our result with an existing result and observed that the optimal allocation policy whose return is with predetermined interest is higher compared to that without predetermined interest.

journal of nonlinear sciences and applications./journal of nonlinear sciences and  applications.

On the optimal asset allocation strategy for a defined contribution pension system with refund clause of premium with predetermined interest under Heston's volatility model