Time consistent pension funding in a defined benefit pension plan with non-constant discounting
The study focuses on an aggregated defined benefit pension plan where the rate of discount is non-constant and the benefit is stochastic. After defining the main characteristics of the pension scheme and the financial market where the fund implements its activities, the analysis is developed from a management perspective. In particular, the management of the defined benefit plan is framed as a stochastic optimal control problem with non-constant discount; within this approach the objective is to minimize on an infinite horizon the contribution rate risk and the solvency risk. Then, by means of dynamic programming techniques, the rate of contribution is derived, as well as the proportion of fund assets put into the risky assets. Numerical illustrations clarify the model by means of suitable simulations concerning the dynamic behavior of the pension fund and the time consistent strategies. Technical insights and proofs of the results presented throughout the paper are contained in Appendix.
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