Maximising with-profit pensions without guarantees

Abstract: Currently, pension providers are running into trouble mainly due to the ultra-low interest rates and the guarantees associated to some pension benefits. With the aim of reducing the pension volatility and providing adequate pension levels with no guarantees, we carry out mathematical analysis of a new pension design in the accumulation phase. The individual's premium is split into the individual and collective part and invested in funds. In times when the return from the individual fund exits a predefined corridor, a certain number of units is transferred to or from the collective account smoothing in this way the volatility of the individual fund. The target is to maximise the total accumulated capital, consisting of the individual account and a portion of the collective account due to a so-called redistribution index, at retirement by controlling the corridor width. We also discuss the necessary and sufficient conditions that have to be put on the redistribution index in order to avoid arbitrage opportunities for contributors.