Risk Management of Pension Fund: A Model for Salary Evolution

• Main Authors: Guglielmo D'Amico, Ada Lika, Filippo Petroni
• Format: Article
• Language: English
• Published: MDPI AG 2019-08-01
• Series: International Journal of Financial Studies
• Subjects: Markov chain; salary lines; reward process
• Online Access: https://www.mdpi.com/2227-7072/7/3/44

In this paper, we propose a semi-Markov chain to model the salary levels of participants in<br />a pension scheme. The aim of the models is to understand the evolution in time of the salary of active<br />workers in order to implement it in the construction of the actuarial technical balance sheet. It is<br />worth mentioning that the level of the contributions in a pension scheme is directly proportional to<br />the incomes of the active workers; in almost all cases, it is a percentage of the worker&#8217;s incomes. As a<br />consequence, an adequate modeling of the salary evolution is essential for the determination of the<br />contributions paid to the fund and thus for the determination of the fund&#8217;s sustainability, especially<br />currently, when all jobs and salaries are subject to changes due to digitalization, ICT, innovation, etc.<br />The model is applied to a large dataset of a real compulsory Italian pension scheme of the first pillar.<br />The semi-Markovian hypothesis is tested, and the advantages with respect to Markov chain models<br />are assessed.