The Optimal Asset Allocation of the Main Types of Pension Funds: A Unified Framework

Posted: 1 Jun 2010

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: May 16, 2007


The existing literature deals with the optimal investment strategy of defined benefit (DB) or defined contribution (DC) pension plans. This paper’s objective is to compare the optimal policies of different types of pension plans. This is done by first defining an original framework, which is based on the distinction between the nature of the guarantee - which can be internal or external - offered by or to a pension fund. This framework allows to establish links between optimization programs of DC, DB and targeted money purchase schemes. The case of an internal guarantee appears as a standard portfolio insurer’s problem. The second kind of guarantee, not analyzed in the literature yet with regard to the resulting optimal policy, is characterized by the existence of an option in the final wealth definition. Four funds are present in the internal guarantee optimal allocation: the speculative component, the preference independent guarantee- and contribution-hedge terms and the preference dependent state variable-hedge fund. The external guarantee program, solved with an original method using the principles of standard options theory, yields an optimal policy incorporating the delta of the option embodied in the final wealth definition. The conclusion is that the resulting optimal portfolio policy becomes riskier.

Keywords: pension funds, defined benefit, defined contribution, asset allocation, internal and external guarantees, stochastic dynamic programming, options theory

JEL Classification: G23, G11, C61

Suggested Citation

Romaniuk, Katarzyna, The Optimal Asset Allocation of the Main Types of Pension Funds: A Unified Framework (May 16, 2007). Geneva Risk and Insurance Review, Vol. 32, No. 2, 2007, Available at SSRN:

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics