A Benchmarking Approach to Optimal Asset Allocation for Insurers and Pension Funds

We solve the optimal asset allocation problem for an insurer or pension fund by using a benchmarking approach. Under this approach the objective is an increasing function of the relative performance of the asset portfolio compared to a benchmark. The benchmark can be, for example, a function of an insurer's liability payments, or the (either contractual or target) payments of a pension fund. The benchmarking approach tolerates but progressively penalizes shortfalls, while at the same time progressively rewarding out-performance. Working in a general, possibly non-Markovian setting, a solution to the optimization problem is presented, providing insights as to the impact of benchmarking on the resulting optimal portfolio