Optimal investment strategies and intergenerational risk sharing under dual constraints for target benefit pension plan

This paper studies optimal investment and benefit payment strategies for a target benefit pension plan under loss aversion. The plan manager maximizes discounted S-shaped utility from benefit payments, subject to a downside constraint. The target benefit is determined by an actuarial equivalence condition linking contributions and benefits, while deviations from the target reflect intergenerational risk sharing. The pension fund invests in a risk-free asset and multiple risky assets. Using the martingale approach, we derive explicit solutions for the optimal investment and benefit payment strategies. Numerical illustrations and sensitivity analyzes highlight the effects of key market parameters on the optimal policies.