Document Type

Article

Publication Date

11-2023

Keywords

public pension finance; H75

Abstract

We propose an economic reformulation of contribution policy integrating: (1) formalization of sustainability as the steady-state contribution rate, incorporating both the expected return on risky assets and a low-risk discount rate for liabilities; (2) derivation of contribution adjustment policies required for convergence toward the target funded ratio and contribution rate; and (3) a stylized optimization framework for simultaneous determination of the target portfolio return and funded ratio. This analysis provides new theoretical insights into the basis for pre-funding vs. pay-as-you-go, resting on the convexity of the long-run risk–return relationship, and also potentially practical guidelines for contribution policy.

Comments

Copyright © The Author(s), 2023. Published by Cambridge University Press.

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

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