Investment policies and reinsurance for pension funds

A pension fund typically faces two sorts of risk. In addition to the actuarial risk, there is an investment risk stemming from the stochastic nature of the rate of return on reserves. These risks depend on the level of reinsurance and the investment policy chosen by the pension fund. The application of Borch's theorem and a result on ‘mutual funds’ make it possible for the optimal level of reinsurance and the optimal investment policy to be determined simulataneously. In particular, it turns out that a low level of reinsurance should never be combined with a cautious investment policy. In addition the paper shows how elements of capital and risk-theory can be combined in one model.