Adaptive Strategies for Pension Fund Management

TL;DR

This paper introduces a simulation-based, adaptable framework for pension fund management that enhances performance by reducing risks and costs through flexible asset and liability strategies.

Contribution

It presents a novel modular simulation framework enabling customized performance metrics and adaptive policies for pension fund management.

Findings

Inclusion of adaptability reduces pension plan costs.

Flexibility decreases probability of default.

Adaptive strategies mitigate longevity and volatility risks.

Abstract

This paper proposes a simulation-based framework for assessing and improving the performance of a pension fund management scheme. This framework is modular and allows the definition of customized performance metrics that are used to assess and iteratively improve asset and liability management policies. We illustrate our framework with a simple implementation that showcases the power of including adaptable features. We show that it is possible to dissipate longevity and volatility risks by permitting adaptability in asset allocation and payout levels. The numerical results show that by including a small amount of flexibility, there can be a substantial reduction in the cost to run the pension plan as well as a substantial decrease in the probability of defaulting.