Dynamic Asset-Liability Management for Defined-Benefit Pension Plans
Boston University - Department of Finance & Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)
Center for Interuniversity Research and Analysis on Organization (CIRANO); Boston University School of Management - Finance and Economics Department
affiliation not provided to SSRN
Paris December 2007 Finance International Meeting AFFI-EUROFIDAI Paper
A dynamic asset-liability management model for defined-benefit pension plans is developed. The plan can be in surplus or deficit. The sponsor is loss averse and tolerates limited shortfalls in assets under management relative to the liability due. The optimal contribution policy, the optimal dividend policy and the associated asset allocation rule are derived and analyzed. Sound Asset-Liability Management is shown to entail future withdrawals from as well as future contributions to the pension fund, even if the current funding shortfall is large. The impact of model parameters, such as contribution capacity, shortfall ratios tolerated, risk aversion and loss aversion, is examined. Wealth effects are found to be critical for the properties of asset allocation rules.
JEL Classification: G23, G35, G11
Date posted: January 10, 2008
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