Structured R.O.C. Government Bond Portfolios in Pension Fund Management: The Case of the Bonus Payment at Chinese Festivals for the Retires

Abstract

This paper investigates structured bond portfolios in pension fund management. We use R.O.C. government bonds to construct three structured bond portfolios: (1) a dedicated portfolio with limited funds, (2) a dedicated portfolio considering idle cash reinvestment, (3) a purely immunized portfolio. This paper proposes Linear Programming models for each portfolio and applies these models to an example, which concerns the bonus payment at Chinese festivals for the retires, to serve for illustrative purpose. We find that the initial cost of the purely immunized portfolio is lower than those of the other two portfolios when the assuming interest rate is high. Since whether the rebalancing cost is lower than the potential gain from rebalancing immunized portfolio is uncertain, the total cost of a purely immunized portfolio may not be lower than the other two portfolios. Moreover, a purely Immunized portfolio always has the risk that the portfolio does not satisfy the liability schedule regardless of whether the assuming interest rate is equal to the future actual interest rate. In contrast, this risk for the other two portfolios can be fully avoided. Finally, member binds of the purely immunizes portfolio are not affected by the assuming interest rate and the style of liability schedule, while the other bond portfolios are.