Defined benefit pension strategy with stochastic volatility

A crucial question in the investment strategy for a defined benefit pension fund is how this strategy will influence the time evolution of the funding level, i.e. the ratio of assets divided by liabilities. Most pension funds split their investment portfolio into a matching part, which resembles the liabilities, and a return part, which seeks high returns by investment in risky assets. Marco van der Burgt proposes a new method for constructing such a strategy, assuming stochastic volatility in the return portfolio

Splitting the portfolio

Most pension funds in the Netherlands are based on the defined benefit (DB) scheme. The financial positions of these DB funds are under pressure due to longevity, the current recession and the low discount rates for liabilities. The fund’s position is often represented by the funding level, which is defined as the fund’s assets divided by its liabilities. The time evolution of the funding level depends critically on how the investment strategy of the fund is set. The investment strategy of most