Author(s)

K. N. C. Njoku¹, Bright O. Osu², Edikan E. Akpanibah³, Rosemary N. Ujumadu⁴

¹Department of Mathematics, Imo State University, Owerri, Nigeria.
²Department of Mathematics, Michael Okpara University of Agriculture, Umudike, Nigeria.
³Department of Mathematics and Statistics, Federal University Otuoke, Yenagoa, Nigeria.
⁴Department of Mathematics, Chukwuemeka Odumegwu Ojukwu University, Uli, Nigeria.

In this paper, optimal investment strategies for defined contribution (DC) Pension, with extra contribution are studied. Our model permits the plan member to make a defined extra contribution, as provided in the Nigerian Pension Reform Act of 2004. The plan member is free to invest in risk-free asset, and in two risky assets. A stochastic differential equation of the pension wealth that takes into account certain agreed proportions of the plan member’s salary, paid as contribution, and extra contribution towards the pension fund, is presented. The Hamilton-Jacobi-Bellman (H-J-B) equation, Legend transformation, and Dual theory are used to obtain the explicit solution of the optimal investment strategies for constant relative risk aversion (CRRA) utility function. We observed that the plan member will increase the proportion of his wealth to be invested in bond and stock and will reduce the proportion to be invested in cash.

Stochastic Optimal Control, Defined Contribution Pension, Hamilton-Jacobi-Bellman Equation, Affine Interest Rate, Extra Contribution

Njoku, K. , Osu, B. , Akpanibah, E. and Ujumadu, R. (2017) Effect of Extra Contribution on Stochastic Optimal Investment Strategies for DC Pension with Stochastic Salary under the Affine Interest Rate Model. Journal of Mathematical Finance, 7, 821-833. doi: 10.4236/jmf.2017.74043.