Stochastic Optimization Methods in Finance and Energy

Volume 163 of the series International Series in Operations Research & Management Science pp 43-71


Performance Enhancements for Defined Benefit Pension Plans

  • John M. MulveyAffiliated withPrinceton University Email author 
  • , Thomas BauerfeindAffiliated withPROTINUS Beratungsgesellschaft mbH & Co. KG
  • , Koray D. SimsekAffiliated withSabanci School of Management, Sabanci University
  • , Mehmet T. VuralAffiliated withORFE Department, Princeton University

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Over the next several decades, traditional corporate and government pension plans will encounter increasingly severe problems in many countries. Contributing factors include underfunding status, demographic trends, low savings rates, and inefficient investment/saving strategies. This chapter takes up the last point, showing that a systematic forward-looking asset–liability management model can improve performance across many reward and risk measures. The model takes the form of a multi-stage stochastic program. We approximate the stochastic program via a set of state-dependent policy rules. A duration-enhancing overlay rule improves performance during economic contractions. The methodology is evaluated via historical backtests and a highly flexible, forward-looking financial planning tool.


Asset and liability management Financial optimization Pension plans Risk management Asset allocation Surplus optimization