Asset liability management for Tanzania pension funds by stochastic programming

Abstract

We present a long-termmodel of asset liability management for Tanzania pension funds. The pension system is pay-as-you-go where contributions are used to pay current benefits. The pension plan is a final salary defined benefit. Two kinds of pension benefits, a commuted (at retirement) and a monthly (old age) pension are considered. A decisive factor for a long-term asset liability management is that, Tanzania pension funds face an increase of their members’ life expectancy, which will cause the retirees to contributors dependence ratio to increase. We present a stochastic programming approach which allocates assets with the best return to raise the asset value closer to the level of liabilities. The model is based on work by Kouwenberg in 2001, with features from Tanzania pension system. In contrast to most asset liability management models for pension funds by stochastic programming, liabilities are modeled by using number of years of life expectancy for monthly benefit. Scenario trees are generated by using Monte Carlo simulation. Numerical results suggest that, in order to improve the long-term sustainability of the Tanzania pension fund system, it is necessary to make reforms concerning the contribution rate, investment guidelines and formulate target funding ratios to characterize the pension funds’ solvency situation. Keywords: Pay-as-you-go pension fund, asset liability management, stochastic programming, scenario trees. AMS 2010 Mathematics Subject Classification: 62P05, 90C15