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Title: Issues in the design of defined-contribution pension plans
Author: Ma, Qing-Ping
Awarding Body: Birkbeck (University of London)
Current Institution: Birkbeck (University of London)
Date of Award: 2008
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Abstract:
This thesis investigates three key issues in the design of defined-contribution (DC) pension plans: the optimal asset allocation strategy. the optimal retirement age and the optimal pension contribution rate. r first derive the optimal asset allocation strategy by dynamic programming for both power utility and exponential utility with stochastic interest rate and wage income. The expected terminal utility is assumed to be a function of wealth-to-wage ratio. For power terminal utility with fully hedgeable wage income or no further contribution, the optimal portfolio composition is horizon independent. For the exponential terminal utility with contribution from wage incomes with uninsurable risk, the optimal portfolio composition is also horizon independent, and the pension plan has a constant optimal pension wealth-to-wage ratio. . I then compare the optimal allocation strategy with three simple dynamic allocation strategies, the lifestyle, the threshold and the constant proportion portfolio insurance (CPPI) strategies, by numerical simulation. The optimal asset allocation strategy produces much better performance than the three simple dynamic allocation strategies. It also shows that the deterministic lifestyle strategy and the threshold strategy can be replicated by static allocations with the same expected returns and smaller vanances. The optimal retirement age and the optimal pension contribution rate problems are solved as part of the expected lifetime utility maximization problem. I show that when utility is solely determined by consumption and there is no defined benefit (DB) pension plan, the retirement age has to be exogenously given. The optimal retirement age is derived for the consumption and leisure additively separable utility and the multiplicatively separable utility. I denve the optimal pension e6tHSaHti9R rates for a gjven retirement age in a certainty world and then demonstrates that the lower and upper bounds of optimal pension contribution rates can be derived for nonlinear marginal utility with uninsurable wage risk.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.504744  DOI: Not available
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