Risk Measures for DC Pension Plan Decumulation
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ID: 282195
2025
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Abstract
As the developed world replaces Defined Benefit (DB) pension plans with
Defined Contribution (DC) plans, there is a need to develop decumulation
strategies for DC plan holders. Optimal decumulation can be viewed as a problem
in optimal stochastic control. Formulation as a control problem requires
specification of an objective function, which in turn requires a definition of
reward and risk. An intuitive specification of reward is the total withdrawals
over the retirement period. Most retirees view risk as the possibility of
running out of savings. This paper investigates several possible left tail risk
measures, in conjunction with DC plan decumulation. The risk measures studied
include (i) expected shortfall (ii) linear shortfall and (iii) probability of
shortfall. We establish that, under certain assumptions, the set of optimal
controls associated with all expected reward and expected shortfall Pareto
efficient frontier curves is identical to the set of optimal controls for all
expected reward and linear shortfall Pareto efficient frontier curves. Optimal
efficient frontiers are determined computationally for each risk measure, based
on a parametric market model. Robustness of these strategies is determined by
testing the strategies out-of-sample using block bootstrapping of historical
data.
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| Authors | Peter A. Forsyth; Yuying Li |
| Journal | arXiv |
| Year | 2025 |
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