Asset-Liability Management in Defined Contribution Pensions: A Stochastic Model with reference to Auto Choice Portfolios in the New Pension System in India

Abstract

The recently witnessed global financial crises forced banks, insurance companies, pension funds and other financial companies — which manage the financial assets of others — to look again into the way assets are managed and liabilities are valued. The Indian financial services industry, which has been opened up in the recent past, could withstand the onslaught of global turmoil to a great extent. However, it is not fully insulated now — and in the future would be more prone to global development — and needs to take long-term strategic decisions to protect itself from the devastating economic consequences originating from the changing business cycle, market volatility and system failure. Institutional investors such as life insurance companies and pension funds need to be more alarmed, since their investment horizon is much longer than that of others and they deal with public money, meaning personal financial risk management (life insurance) and retirement income (pension funds). The health of the fund management business depends to a large extent on understanding changing national and global economies, the movement of the business cycle, potential risks associated with the market and the ability to design an appropriate investment strategy to capture these changes and absorb the untimely adverse developments.