Article2008

OR PRACTICE—Assisting Defined-Benefit Pension Plans

John M. Mulvey · Koray D. Simsek · Zhuojuan Zhang · Frank J. Fabozzi · William R. Pauling

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Risk and Portfolio Optimization Financial Literacy, Pension, Retirement Analysis Stochastic processes and financial applications

Abstract

The defined-benefit pension system poses substantial, long-term risks for the U.S. economy. We describe a flexible asset-liability management (ALM) system for pension planning. The primary goals are to improve the performance and survivability of the pension trust. We first employ a stochastic program for enhancing investment strategies in light of company and other goals and pension risk constraints. The results are linked with a policy simulator for further analysis. We illustrate the concepts via two disparate real-world companies. The first is a slowly growing auto company, and the second a profitable pharmaceutical enterprise. We show that a stochastic program can help in the process of discovering sound policy rules. The ALM system has been employed extensively throughout the world by a large global actuarial firm.

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References

2011Introduction to Stochastic Programming 2010Stochastic Programming 1997Introduction to Stochastic Programming 1995Stochastic Programming 1998Risk management, capital budgeting, and capital structure policy for financial institutions: An integrated approach 2006Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans 2001Generating Scenario Trees for Multistage Decision Problems 1998Worldwide asset and liability modeling

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2018Pension fund management with hedging derivatives, stochastic dominance and nodal contamination

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