TY - JOUR
T1 - Optimal long-term Tier 1 employee pension management with an application to Chinese urban areas
AU - Ji, Bingbing
AU - Chen, Zhiping
AU - Consigli, Giorgio
AU - Yan, Zhe
N1 - Funding Information:
Zhiping Chen acknowledges support from the National Natural Science Foundation of China [grant numbers 11991023, 11901449, 11735011]. Giorgio Consigli acknowledges support from Khalifa University of Science and Technology, Grant FSU 2022-010 award 000634-00001, project no. 8474000393.
Publisher Copyright:
© 2022 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2022
Y1 - 2022
N2 - We formulate a stochastic optimization problem from the perspective of an investment committee responsible for Tier 1 social security pension policies and whose decisions are bound to have relevant economic and social consequences. The adopted modelling approach combines canonical multistage stochastic programming (MSP) with dynamic stochastic control (DSC): the first applies to the short-medium term, the second to the long-term. Through the combined framework, we are able to span a long planning horizon without jeopardizing the accuracy of scenario tree based medium-term planning. We apply this methodology to the Chinese pension system, which relies on two large reference areas for rural and urban populations. In this article, we concentrate on the ever-growing urban public pension system, which is facing significant challenges due to a declining workforce and a rapidly ageing population. This welfare area, originally conceived as a pay-as-you-go (PAYG) system, has undergone several recent reforms to enhance its long-term sustainability and reduce the interventions of the central government required to improve its funding condition. Among those relevant in our setting, is the reduction of policy constraints that until 2015 severely limited the possibility to invest in assets other than traditional, locally traded, long-term fixed income securities. We propose an optimization model in which the decisions of the investment management aim at significantly reducing central government interventions as a last resort liquidity provider and progressively improving the system funding condition. A rich set of computational and economic evidence is presented to validate the methodology and clarify its potential benefits to pension system efficiency.
AB - We formulate a stochastic optimization problem from the perspective of an investment committee responsible for Tier 1 social security pension policies and whose decisions are bound to have relevant economic and social consequences. The adopted modelling approach combines canonical multistage stochastic programming (MSP) with dynamic stochastic control (DSC): the first applies to the short-medium term, the second to the long-term. Through the combined framework, we are able to span a long planning horizon without jeopardizing the accuracy of scenario tree based medium-term planning. We apply this methodology to the Chinese pension system, which relies on two large reference areas for rural and urban populations. In this article, we concentrate on the ever-growing urban public pension system, which is facing significant challenges due to a declining workforce and a rapidly ageing population. This welfare area, originally conceived as a pay-as-you-go (PAYG) system, has undergone several recent reforms to enhance its long-term sustainability and reduce the interventions of the central government required to improve its funding condition. Among those relevant in our setting, is the reduction of policy constraints that until 2015 severely limited the possibility to invest in assets other than traditional, locally traded, long-term fixed income securities. We propose an optimization model in which the decisions of the investment management aim at significantly reducing central government interventions as a last resort liquidity provider and progressively improving the system funding condition. A rich set of computational and economic evidence is presented to validate the methodology and clarify its potential benefits to pension system efficiency.
KW - Chinese public pension fund
KW - Dynamic programming
KW - Long-term sustainability
KW - Multistage stochastic programming
KW - Sensitivity analysis
KW - Strategic asset allocation
UR - http://www.scopus.com/inward/record.url?scp=85133678505&partnerID=8YFLogxK
U2 - 10.1080/14697688.2022.2092329
DO - 10.1080/14697688.2022.2092329
M3 - Article
AN - SCOPUS:85133678505
SN - 1469-7688
VL - 22
SP - 1759
EP - 1784
JO - Quantitative Finance
JF - Quantitative Finance
IS - 9
ER -