PENSION FUNDING AND INVESTMENT: A MULTIPLE CRITERIA DECISION MAKING APPROACH (INSURANCE, MANAGEMENT SCIENCE)

The purpose of this dissertation is to develop and demonstrate a multiple-criteria approach to select an optimal funding and investment strategy for a defined-benefit trusteed private pension plan.; The study explores the use of an iterative multiple goal programming (IMGP) technique--a hybrid of goal programming and interactive procedures--to assist decision-makers in the selection of the pension fund portfolio asset mix as well as to allocate efficiently the appropriate amount of contribution made to the fund.; The model adopts a passive buy and hold strategy for all-bond portfolio. Four relevant goals were introduced, they are: (a) to maximize the expected return of the portfolio; (b) to minimize the default risk on risky bonds; (c) to minimize reinvestment risk; and (d) to minimize the contribution cost to the fund.; Using the IMGP procedure, the decision-maker is required to construct a potency matrix consisting of vectors of the ideal and pessimistic values of each goal. The first solution to the problem is obtained from the various minimum achievable values of each goal. If the solution is satisfactory, then it is accepted. Otherwise, the potency matrix is recalculated at which time the decision-maker will indicate his preference as to which goal value ought to be raised or reduced. Changes will be made from iteration to iteration until a satisfactory solution is obtained.; The IMGP is a relatively new decision-making technique. It is simple to understand and to use. The procedure is capable of handling multiple conflicting and incommensurable objectives while requiring only minimum preference information from the decision-maker.; The whole procedure took seven iterations to arrive at a final satisfactory set of solutions consisting of the goal values and other related decision variables. The goal values obtained can be used to shape the investment and funding policies of a pension fund. It provides management with a set of short-term targets that act as a bench mark for the pension manager. Having procedures like the IMGP permits the decision-maker to evaluate the sensitivity of his judgment towards investment and funding implications of the fund.