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Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan
Author(s) -
Cox Samuel H.,
Lin Yijia,
Tian Ruilin,
Yu Jifeng
Publication year - 2013
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2012.01508.x
Subject(s) - longevity risk , downside risk , asset allocation , pension , hedge , asset (computer security) , longevity , actuarial science , plan (archaeology) , business , risk management , economics , capital market , pension plan , finance , portfolio , computer science , history , ecology , genetics , computer security , archaeology , biology
A BSTRACT This article proposes a model for a defined benefit pension plan to minimize total funding variation while controlling expected total pension cost and funding downside risk throughout the life of a pension cohort. With this setup, we first investigate the plan's optimal contribution and asset allocation strategies, given the projection of stochastic asset returns and random mortality evolutions. To manage longevity risk, the plan can use either the ground‐up hedging strategy or the excess‐risk hedging strategy. Our numerical examples demonstrate that the plan transfers more unexpected longevity risk with the excess‐risk strategy due to its lower total hedge cost and more attractive structure.