Optimal Investment Strategy Of Hybrid Pension Plan Under Stochastic Inflationand Default Risk

The changes in the financial environment and the increase in life expectancy have put great pressure on the pension system,the proportion of retirees is increasing,and the policy of delaying retirement is gradually falling into place,the regulatory framework for pension funds has improved.It is more and more difficult for the traditional pension plan to meet the demand of the pension market,and a large number of mixed pension plans with the characteristics of DB and DC have appeared.One of the main objectives of a hybrid pension scheme is to provide better retirement security on a sustainable,stable and affordable basis,pension plans are made more equitable by sharing pension risks to varying degrees between employers and employees and between different age groups.Under the background of increasing uncertainty of international financial environment,China’s pension insurance mechanism also needs to keep up with the times and enhance the awareness of risk protection.In recent years,increasing market volatility and falling interest rates have put pension plans at risk of inflation and default,and insurance companies are actively involved in trading high-yield bonds with the risk of default,it is necessary to consider the investment option of the insurance company on the defaultable bonds because of the long investment period of the pension fund and the impact of the bond default on the continuity of the pension plan.In addition,the asset-liability management framework is widely used in pension plan,which can be used to study the financing and payment of pension plan.This paper designs a hybrid pension scheme to amortize the surplus or deficit caused by the difference between the actuarial liability and the value of the fund,pension risks can be managed and shared by different generations.We consider the optimal investment strategy of the hybrid pension plan under stochastic inflation and default risk,and study the arrangement of the hybrid pension plan under the balance sheet framework.First,it is assumed that the pension fund invests in risk-free financial assets and risky financial assets,and both the pension fund assets and the plan accrued liabilities are subject to stochastic process.Previous studies have shown that ignoring inflation can skew the results.Therefore,this paper uses stochastic process to describe inflation and constructs a hybrid pension plan model based on inflation risk.Using the stochastic optimal control method,the closed form solution is derived under the quadratic loss function,that is,the optimal asset allocation and the optimal contribution and benefit adjustment of the hybrid pension plan.Finally,a numerical simulation of the results is carried out using the Monte Carlo method.The results show that the existence of inflation risk will lead to the increase of the proportion of risk assets in the investment plan and the relative increase of investment risk.Then,the bond default event will bring the influence for the pension plan’s continuity.Therefore,this article has added the default risk factor to carry on the follow-up research.The closed form solution is derived by using the stochastic optimal control method under the exponential loss function,and the numerical simulation is carried out by using the Monte Carlo method.The results show that the degree of loss aversion of employees and retirees will influence the optimal payment adjustment strategy and the optimal income adjustment strategy.The parameters in both the risk asset model and the defaultable bond price model will influence the investment strategy of the risk asset and the defaultable bond.Finally,the research results are summarized,and the shortcomings of this paper and possible future research prospects are put forward.