Benefit Volatility-Targeting Strategies in Lifetime Pension Pools

Lifetime pension pools – also known as group self-annuitization plans and tontines – allow retirees to convert a lump sum into lifelong income, with payouts linked to investment performance and the pool’s collective mortality experience. Existing literature has predominantly examined basic investment strategies like constant allocations and investments solely in risk-free assets. Recent studies, however, proposed volatility targeting, aiming to enhance risk-adjusted returns and minimize downside risk. Yet they only considered investment risk in the volatility target, neglecting the impact of mortality risk. This presentation thus aims to address this gap by investigating volatility-targeting strategies for both investment and mortality risks, offering a solution that keeps the risk associated with benefit variation as constant as possible through time. Practical investigations of the strategy demonstrate the effectiveness and robustness of the new dynamic volatility-targeting approach.