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Performance Enhancements for Defined Benefit Pension Plans

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Stochastic Optimization Methods in Finance and Energy

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 163))

Abstract

Over the next several decades, traditional corporate and government pension plans will encounter increasingly severe problems in many countries. Contributing factors include underfunding status, demographic trends, low savings rates, and inefficient investment/saving strategies. This chapter takes up the last point, showing that a systematic forward-looking asset–liability management model can improve performance across many reward and risk measures. The model takes the form of a multi-stage stochastic program. We approximate the stochastic program via a set of state-dependent policy rules. A duration-enhancing overlay rule improves performance during economic contractions. The methodology is evaluated via historical backtests and a highly flexible, forward-looking financial planning tool.

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Notes

  1. 1.

    We define the term “pension surplus” to indicate the difference between the market value of assets and the present value of liabilities (positive or negative). A related term is the funding ratio: market value of assets/present value of liabilities.

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Author information

Authors and Affiliations

  1. Princeton University, Princeton, NJ, USA

    John M. Mulvey

  2. PROTINUS Beratungsgesellschaft mbH & Co. KG, Munich, Germany

    Thomas Bauerfeind

  3. Sabanci School of Management, Sabanci University, Tuzla, Istanbul, Turkey

    Koray D. Simsek

  4. ORFE Department, Princeton University, Princeton, NJ, USA

    Mehmet T. Vural

Authors
  1. John M. Mulvey
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  2. Thomas Bauerfeind
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  3. Koray D. Simsek
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  4. Mehmet T. Vural
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Corresponding author

Correspondence to John M. Mulvey .

Editor information

Editors and Affiliations

  1. , Department of Mathematics, Statistics, C, University of Bergamo, Via dei Caniana 2, Bergamo, 24127, Italy

    Marida Bertocchi

  2. , Department of Mathematics, Statistics, C, University of Bergamo, Via dei Caniana 2, Bergamo, 24127, Italy

    Giorgio Consigli

  3. Dept. Pure Mathematics and, Mathematical Statistics, University of Cambridge, Mill Lane 16, Cambridge, CB2 1SB, United Kingdom

    Michael A. H. Dempster

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Mulvey, J.M., Bauerfeind, T., Simsek, K.D., Vural, M.T. (2011). Performance Enhancements for Defined Benefit Pension Plans. In: Bertocchi, M., Consigli, G., Dempster, M. (eds) Stochastic Optimization Methods in Finance and Energy. International Series in Operations Research & Management Science, vol 163. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-9586-5_3

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