On The Optimal Portfolio Strategy Of Corporate Pension In Liability-Driven Investment

Corporate pension is one of the fundamental pillars of China's old-age security system. Due to the gradual liberalization of interest rate and the emerging of longevity risk, The asset and liability risk management of China's corporate pension fund is under great pressure. Up to now an obvious funding gap already lies in China's pension system, The reasons are as follow:first, the accumulation of excessive; second, the deficiencies of the dual-track system; third, improper investment with low yield. So it is urgent as in how to improve the pension investment management system, how to insist on adhering to the professional and market oriented road, and how to insist on refining management and improving the funding efficiency of pension investment.China's investment weight on equity and fund is much lower compares to developed countries. So it is becoming an urgent problem to utilize the pension investment structure and to gain the pension investment yield under the premise of controllable risks. the traditional mean-variance investment method aims to gain the maximum investment return, however, as for pension fund which has a long investment horizon with complicated risks, this method will probably cause the mismatch of asset and liability, and eventually cause the insolvent crisis. This mismatch issue can be solved by switching to the asset liability management approach which concerns the dynamics between asset and liability cash flows, the ALM approach strikes a balance between the profitability of asset and the pressure from liability. The liability-driven investment strategy is a particular ALM approach that focuses on the corporate pension fund's coverage ratio, which is the most obvious advantage in corporate pension investment. Under the increasingly serious background of population aging, the liability driven investment method has it's practical implication in improving China's pension fund support ability and filling the funding gap.This thesis focuses on China's corporate pension fund's portfolio investment with liability-driven strategy from the ALM framework. The first part is a brief introduction of the different corporate pension plans, investment strategies and the advantages of liability-driven strategy. then with the two fundamental issues that lies in today's corporate pension system, which are longevity risk and market risk, the mortality-financial market model is built through the Lee-Carter three factors model and Hull-White interest rate model; afterwards the cash flow model of corporate pension with the pension actuarial model and standard assumptions of a particular corporation is constructed; with all these preparations, a liability driven optimal investment strategy is introduced, with Monte-Carlo simulation the corporate pension's future investment yields through the mortality-financial model is measured and compared with the traditional strategy.The results show that liability driven investment can make a balance between the liability liquidity requirement as well as the overall investment performance requirement. This strategy can improve corporate pension's solvency and make better old-age security guarantee to the pension members.