The Recovery Potential for underfunded Pension Plans

We investigate whether risk-taking for resurrection type of risk preference (non-constant risk aversion) can increase the probability of achieving inflation-indexed pension benefits at retirement, especially when the starting position is underfunded. By maximizing the expected utility of the ratio of final wealth to a close approximation of this inflation-indexed target fund, we find that this non-constant risk aversion type of utility gives a high degree of certainty about achieving a certain percentage of this desired target fund. The CRRA utility is too risk-averse to overcome under-funding.