Target benefit versus defined contribution scheme: a multi-period framework

Ping Chen, Haixiang Yao*, Hailiang Yang, Dan Zhu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


A target benefit plan (TBP) is a collective defined contribution (DC) plan that is growing in popularity in Canada. Similar to DC plans, TBPs have fixed contribution rates, but they also implement pooling of longevity and investment
risk. In this paper, we formulate a multi-period model that incorporates two sources of risk – asset risk and labor income risk for active members. We present an optimal investment and retirement benefits schedule for TBP
members with a fixed contribution rate. Using Australian data from 1965 to 2018, we evaluate the performance of the optimal TBP scheme and compare it to the optimal DC scheme. By adopting the benefit–investment strategy
derived in this paper, we demonstrate the stability of benefit distribution over time for a TBP scheme in this stochastic formulation. To outperform the DC scheme’s benefit payment, careful consideration shall be given to the benefit target in the TBP scheme. A high target may not be achievable, while a low target can impede the accumulation momentum of the fund’s wealth in its early stages. Moreover, a TBP fund’s investment strategy is primarily influenced by the wealth target, with more aggressive investments in risky assets as the wealth target increases. This analysis may shed light on the possible improvements to retirement planning in Australia. Although the results are sensitive to the choice of model parameters, overall, the proposed TBP promotes system stability in various scenarios.
Original languageEnglish
Article number3
Pages (from-to)545-579
Number of pages35
JournalASTIN Bulletin
Issue number3
Publication statusPublished - 16 Sept 2023


  • Collective defined contribution;
  • multi-period;
  • optimal investment;
  • replacement rate;
  • stochastic wage


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