Care-Dependent Target Benefit Pension Plan with Minimum Liability Gap
By Ruotian Ti, Ximin Rong, Cheng Tao & Hui Zhao
With the progressive aging of populations, the significance of long-term care (LTC) services in aging societies is growing. In this paper, we integrate LTC services with pensions, studying a stochastic model for a care-dependent target benefit pension (TBP) plan. The plan members’ target benefit rates are set according to the care cost for three different health states, i.e., healthy, mildly disabled and severely disabled states. And the pension contributions reflect both intergenerational equity and intergenerational risk sharing. The pension liability metric is defined as the potential compensation to all active and retired members, under the assumption of the pension fund default. The objective of minimizing the benefit gap and liability gap is achieved by addressing a stochastic optimal control problem. Then we derive analytic solutions for optimal investment and benefit payment strategies by employing the corresponding Hamilton-Jacobi-Bellman (HJB) equation.
Source SSRN
