A note on bequest preferences in utility maximisation for modern tontines

TL;DR

This paper discusses optimal control verification and dynamic bequest preferences in modern tontines, proposing a dual approach and time-dependent bequest rules that lead to linear adjustments in tontine allocations over time.

Contribution

It introduces a dual approach for verifying optimal controls and models time-dependent bequest preferences, resulting in a linear tontine allocation strategy over time.

Findings

Optimal control verification can be effectively performed using a dual approach.

Bequest preferences should be time-dependent to produce realistic investment strategies.

Tontine allocations adjust almost linearly from 0% to 100% over time.

Abstract

In this short note, we address two issues in the literature about modern tontines with bequest and utility maximisation: how to verify optimal controls and the decreasing allocation of funds in the tontine. We want to raise awareness in the actuarial community about the dual approach to solve optimal control problems when working with power utilities. Additionally, we point out that bequest preferences should be time-dependent or otherwise yield unrealistic investment strategies. We base our attempt at modelling bequest preferences on common sense rules like 100% payback upon death at the start that vanishes over time. Our modelling shows that the resulting investment strategy almost linearly adjusts the allocation in the tontine from 0% to 100% over time.