Samuel H. Cox is the L. A. H. Warren Chair Professor at the Asper School of Business, University of Manitoba. Yijia Lin is in the Department of Finance, College of Business Administration, University of Nebraska–Lincoln. Ruilin Tian is in the Department of Accounting, Finance, and Information System, College of Business, North Dakota State University. Jifeng Yu is in the Department of Management, College of Business Administration, University of Nebraska–Lincoln. The second author can be contacted via e-mail: email@example.com. This article was presented at the seventh International Longevity Risk and Capital Market Solutions Symposium in Frankfurt, Germany, in September 2011. The authors appreciate helpful comments from the participants at the meeting. The authors also thank the associate editor and the two anonymous referees for their very helpful suggestions and comments during the revision process.
Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan
Article first published online: 10 APR 2013
© The Journal of Risk and Insurance, 2013
Journal of Risk and Insurance
Volume 80, Issue 3, pages 585–620, September 2013
How to Cite
Cox, S. H., Lin, Y., Tian, R. and Yu, J. (2013), Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan. Journal of Risk and Insurance, 80: 585–620. doi: 10.1111/j.1539-6975.2012.01508.x
- Issue published online: 29 AUG 2013
- Article first published online: 10 APR 2013
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.