Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan

Journal of Risk and Insurance, Vol. 80, Issue 3, pp. 585-619, 2013

42 Pages Posted: 26 Jan 2013 Last revised: 2 Oct 2013

See all articles by Samuel H. Cox

Samuel H. Cox

University of Manitoba - Asper School of Business

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Ruilin Tian

North Dakota State University - Department of Accounting, Finance, and Information Systems

Jifeng Yu

University of Nebraska-Lincoln

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2012

Abstract

This paper 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.

Keywords: defined benefit pension plan, funding, asset allocation, contribution, longevity risk hedging

Suggested Citation

Cox, Samuel H. and Lin, Yijia and Tian, Ruilin and Yu, Jifeng, Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan (November 21, 2012). Journal of Risk and Insurance, Vol. 80, Issue 3, pp. 585-619, 2013. Available at SSRN: https://ssrn.com/abstract=2207441

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Yijia Lin (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Ruilin Tian

North Dakota State University - Department of Accounting, Finance, and Information Systems ( email )

Fargo, ND
United States
7012316544 (Phone)
7012316545 (Fax)

Jifeng Yu

University of Nebraska-Lincoln ( email )

United States

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