2019/04/23 by Ankush Agarwal, Agarwal, Ankush, Christian‐Oliver Ewald +3
Business, Management and Accounting · Health Professions · Social Sciences · #FOS: Economics and business #Financial Literacy, Pension, Retirement Analysis #Global Health Care Issues #Insurance, Mortality, Demography, Risk Management #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1904.10229
openalex publication_date 2019/04/23 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Pension schemes all over the world are under increasing pressure to efficiently hedge the longevity risk posed by ageing populations. In this work, we study an optimal investment problem for a defined contribution pension scheme which decides to hedge the longevity risk using a mortality-linked security, typically a longevity bond. The pension scheme invests in the risky assets available in the market, including the longevity bond, by using the contributions from a representative scheme member to ensure a minimum guarantee such that the member is able to purchase a lifetime annuity upon retirement. We transform this constrained optimal investment problem into an unconstrained problem by replicating a self-financing portfolio of future contributions from the member and the minimum guarantee provided by the scheme. We solve the resulting optimisation problem using the dynamic programming principle and through a series of numerical studies reveal that the longevity risk has an important impact on the performance of investment strategies. Our results provide mathematical evidence supporting the use of mortality-linked securities for efficient hedging of the longevity risk.