Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287132 
Year of Publication: 
2021
Citation: 
[Journal:] European Actuarial Journal [ISSN:] 2190-9741 [Volume:] 12 [Issue:] 2 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2021 [Pages:] 647-700
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
In this article we consider the post-retirement phase optimization problem for a specific pension product in Germany that comes without guarantees. The continuous-time optimization problem is defined consisting of two specialties: first, we have a product-specific pension adjustment mechanism based on a certain capital coverage ratio which stipulates compulsory pension adjustments if the pension fund is underfunded or significantly overfunded. Second, due to the retiree's fear of and aversion against pension reductions, we introduce a total wealth distribution to an investment portfolio and a buffer portfolio to lower the probability of future potential pension shortenings. The target functional in the optimization, that is to be maximized, is the client's expected accumulated utility from the stochastic future pension cash flows. The optimization outcome is the optimal investment strategy in the proposed model. Due to the inherent complexity of the continuous-time framework, the discrete-time version of the optimization problem is considered and solved via the Bellman principle. In addition, for computational reasons, a policy function iteration algorithm is introduced to find a stationary solution to the problem in a computationally efficient and elegant fashion. A numerical case study on optimization and simulation completes the work with highlighting the benefits of the proposed model.
Subjects: 
Pension investments
Post-retirement phase
Optimal portfolio
Buffer mechanism
Pension adjustments
HARA utility function
Policy function iteration
JEL: 
G11
G22
C61
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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