Optimal Collective Investment: The Impact of Sharing Rules, Management Fees and Guarantees

49 Pages Posted: 20 Sep 2018 Last revised: 25 Jan 2020

See all articles by An Chen

An Chen

University of Ulm

Thai Nguyen

University of Ulm - Institute of Insurance Science

Manuel Rach

University of Ulm - Institute of Insurance Science

Date Written: January 23, 2020

Abstract

Many pension beneficiaries are reluctant to give up guaranteed payments, as they believe that their benefits will deteriorate through this. In the present article, we design and solve an optimal collective investment problem under a guarantee constraint. In this problem, we incorporate heterogeneous risk preferences of individual plan members, whose importance has recently been addressed in Alserda et al. (2019). We distinguish between two types of investors (with different willingness to pay management fees) and study the impact of guarantees, sharing rules and management fees on the individual investors' benefits. Regarding the guarantees, we find that requiring deterministic guarantees deteriorates the benefits of investors with different risk aversions in both groups. A flexible guarantee which consists of a deterministic and a state-dependent component turns out to serve each investor's risk appetite in a much better way than the deterministic guarantee. To decently achieve fairness among various investors, careful considerations shall be given to the design of the sharing rule.

Keywords: Collective investment problems, guarantee design, risk sharing

JEL Classification: G11, G23

Suggested Citation

Chen, An and Nguyen, Thai and Rach, Manuel, Optimal Collective Investment: The Impact of Sharing Rules, Management Fees and Guarantees (January 23, 2020). Available at SSRN: https://ssrn.com/abstract=3249094 or http://dx.doi.org/10.2139/ssrn.3249094

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Thai Nguyen

University of Ulm - Institute of Insurance Science ( email )

Ulm, 89081
Germany

Manuel Rach (Contact Author)

University of Ulm - Institute of Insurance Science ( email )

Ulm, 89081
Germany

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