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David Schiess
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PublicationOptimal Design of the Attribution of Pension Fund Performance to EmployeesThe article analyzes risk sharing in a defined contribution pension fund in continuous time. According to a prespecified attribution scheme, the interest rate paid on the employees' accounts is a linear function of the fund's investment performance. For each attribution scheme, the pension fund maximizes the expected utility and the employees derive utility from their savings accounts. It turns out that all Pareto-optimal attribution schemes are characterized by the same optimal participation rate. We derive the total welfare gain that installs from replacing no participation with optimal participation. This welfare gain can be quantified and is substantial for reasonable parameter values.Type: journal articleJournal: The Journal of Risk and InsuranceVolume: 81Issue: 2
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PublicationHow a Pensioner Should Invest, Consume, Annuitise and Bequeath( 2008-10-22)The task of finding optimal consumption, asset allocation and the optimal annuitisation time for a pensioner leads to a combined optimal stopping and optimal control problem (COSOCP). In the no-bequest case it is optimal for the pensioner to annuitse immediately or never depending on the parameters of the model. However, there is an absurd strong tendency for the annuity market which can be eliminated with the inclusion of a bequest motive. Allowing for a bequest motive and consequently, for prior life insurance and a subsistence level of bequests, makes the optimisation problem technically quite involved and normally leads to a wealth-dependent annuitisation decision rule. The pensioner annuitises as soon as his wealth level falls below some threshold which exhibits a very natural parameter dependence. The main result is clearly that the essential inclusion of a bequest motive turns the very strong tendency for the annuity market into a slight tendency for the financial market. But even in the bequest case there are many realistic situations where the pensioner chooses the annuity market. This highlights the importance of longevity risk and, in combination with the intergenerational risk transfer argument discussed in Baumann and Müller (2008), it provides a legitimation for pension funds.Type: journal articleJournal: Health and Ageing Newsletter, The Geneva Association, Risk & Insurance EconomicsVolume: OctoberIssue: 19