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Optimal VIX-linked structure for the target benefit pension plan

Published online by Cambridge University Press:  18 October 2023

Lv Chen ,
Danping Li ,
Yumin Wang  and
Xiaobai Zhu Open the ORCID record for Xiaobai Zhu [Opens in a new window]
Lv Chen
Affiliation:
Academy of Statistics and Interdisciplinary Sciences, KLATASDS-MOE, East China Normal University, Shanghai, China
Danping Li*
Affiliation:
School of Statistics, KLATASDS-MOE, East China Normal University, Shanghai, China
Yumin Wang
Affiliation:
Warren Centre for Actuarial Studies and Research, University of Manitoba, Winnipeg, Canada
Xiaobai Zhu
Affiliation:
Department of Finance, CUHK Business School, Hong Kong, China
*
Corresponding author: Danping Li; Email: dpli@fem.ecnu.edu.cn
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Abstract

In this paper, we study the optimal VIX-linked target benefit (TB) pension design. By applying the dynamic programming approach, we show the optimal risk-sharing structure for the benefit payment exhibits a linear form that consists of three components: (1) a model-robust performance adjustment, (2) a counter-cyclical volatility adjustment that depends on the VIX index, and (3) a TB level that is partially indexed to the cost-of-living adjustment. Differences between our results and the previous literature are highlighted via both theoretical derivations and numerical illustrations.

Keywords

Target benefit planintergenerational risk sharingvolatility indexpartial indexation

Information

Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 54 , Issue 1 , January 2024 , pp. 75 - 93
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of The International Actuarial Association

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