Seminar by Rudi Zagst

Please Note: This seminar will be given online.

Optimal investment strategies for pension funds in the absence of guarantees

We consider the pre- and 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 an 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.

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 presentation with highlighting the benefits of the proposed model.