Three essays in pension finance

This thesis focuses on the three major participants in pension finance, namely, pension funds, individuals, and sponsoring companies. In the light of the fragile financial market performance, prudential regulatory rules, including Value-at-Risk (VaR) constraints, are imposed widely all over the world. The purpose of these regulations is to reduce the risk of pension funds and protect pension fund participants. However, the regulatory horizon is usually much shorter than the institutional investors' investment horizon. Chapter 2 investigates the optimal investment strategies of a pension fund under such a misalignment. Defined Benefit and Defined Contribution are the two most common types of pension plans. Individuals with Defined Contributions (DC) pension plan get a lump sum when they retire. They can then decide whether and when to annuitize the lump sum. The annuity income depends on the size of the pension wealth and the interest rate at the annuitization time. Chapter 3 analyzes retirement timing decisions of DC pension plan participants, taking into account the optimal annuitization timing decision. Companies sponsoring underfunded plans are typically required by law to make additional financial contributions to close the funding gap. In the midst of a financial crisis, mandatory contributions will severely tighten financial constraints of sponsoring companies. Chapter 4 develops an optimal investment strategy for a company sponsoring an under-funded pension plan with a mandatory contribution requirement, aiming to reduce the impact of mandatory contributions on financial constraints.