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Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational Pension Plans in South Korea*

Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational... We assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal‐protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime‐switching model outperforms an unconditional static portfolio. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational Pension Plans in South Korea*

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Publisher
Wiley
Copyright
© 2022 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/ajfs.12396
Publisher site
See Article on Publisher Site

Abstract

We assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal‐protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime‐switching model outperforms an unconditional static portfolio.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Oct 1, 2022

Keywords: ALM; Conditional surplus at risk; Hidden Markov model; Optimization; Portfolio; E32; E37; G11

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