Optimal Dynamic Asset Allocation for Defined Contribution Pension Plans

This paper examines optimal investment strategies for defined-contribution pension plans. We will focus on the replacement ratio as the central quantity of interest: that is, the pension at the time of retirement divided by the final salary at retirement. Related work (Blake, Cairns & Dowd, 1999) has concentrated on the evaluation of the value-at-risk for the replacement ratio with various confidence levels. Here we suppose that the policyholder has a specific terminal utility function which quantifies the value, to the policyholder, of different replacement ratios relative to one another. What, then, is the asset-allocation strategy over the accumulation phase of the plan that will maxmise the expected utility at the time of retirement? A similar question has been posed recently by Boulier et al. (1999) and Deelstra et al.