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Optimal Design of the Attribution of Pension Fund Performance to Employees
Author(s) -
Müller Heinz,
Schiess David
Publication year - 2014
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.1539-6975.2013.01516.x
Subject(s) - pension , attribution , pension fund , welfare , target date fund , investment (military) , economics , function (biology) , actuarial science , microeconomics , pareto principle , rate of return , expected utility hypothesis , econometrics , finance , open end fund , financial economics , institutional investor , operations management , corporate governance , market economy , psychology , social psychology , evolutionary biology , politics , political science , law , biology
The article analyzes risk sharing in a defined contribution pension fund in continuous time. According to a prespecified attribution scheme, the interest rate paid on the employees' accounts is a linear function of the fund's investment performance. For each attribution scheme, the pension fund maximizes the expected utility and the employees derive utility from their savings accounts. It turns out that all Pareto‐optimal attribution schemes are characterized by the same optimal participation rate. We derive the total welfare gain that installs from replacing no participation with optimal participation. This welfare gain can be quantified and is substantial for reasonable parameter values.