Time-consistent Strategies Between Two Competitive DC Pension Plans with the Return of Premiums Clauses and Salary Risk

In practice, there is always competition among different pension managers. The competitive pension managers are concerned about their relative performance to make better decisions. In addition, to protect the rights of plan members who die before retirement, most of the defined contribution (DC) pension plans contain return of premiums clauses. In this article, we introduce the return of premiums clauses into two competitive DC pension plans with salary risk. Each pension manager cares about not only his own terminal wealth but also his relative wealth versus his competitor. Both the pension managers are allowed to invest the premiums in a financial market, which consists of one risk-free asset and one risky asset whose price process follows the constant elasticity of variance (CEV) model. We investigate the time-consistent investment strategies of the two pension managers under the mean-variance (MV) criterion. The aim of each pension manager is to maximize the mean and minimize the variance of his relative terminal wealth. The explicit expressions of the time-consistent strategies and the efficient frontiers are obtained via applying the extended stochastic optimal control theory. Some special cases are also discussed in detail. Finally, a numerical simulation demonstrates the results obtained.