GUARANTEE VALUATION IN NOTIONAL DEFINED CONTRIBUTION PENSION SYSTEMS

Jennifer Alonso-Garcia*, Pierre Devolder

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

5 Citations (Scopus)
58 Downloads (Pure)

Abstract

The notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here, we provide a minimum return guarantee to the pension contributions. The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

Original languageEnglish
Pages (from-to)677-707
Number of pages31
JournalAstin bulletin
Volume46
Issue number3
DOIs
Publication statusPublished - Sep-2016
Externally publishedYes

Keywords

  • Public pension
  • pay-as-you-go
  • option pricing
  • incomplete markets
  • exponential utility
  • INCOMPLETE MARKETS
  • TERM STRUCTURE
  • UTILITY MAXIMIZATION
  • SOCIAL-SECURITY
  • INTEREST-RATES
  • OPTIMAL MIX
  • CONSUMPTION
  • LIABILITIES
  • RETURNS
  • ENTROPY

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