Intergenerational Effects of Guaranteed Pension Contracts

28 Pages Posted: 13 Mar 2007

See all articles by Trond Døskeland

Trond Døskeland

NHH Norwegian School of Economics

Helge Nordahl

Norwegian School of Economics (NHH) - Department of Finance

Date Written: October 2006

Abstract

In this paper we show that there exist an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation.

Keywords: Portfolio Choice, Life and Pension Insurance, Interest Rate Guarantees

JEL Classification: G11, G13, G22

Suggested Citation

Døskeland, Trond and Nordahl, Helge, Intergenerational Effects of Guaranteed Pension Contracts (October 2006). NHH Dept. of Finance & Management Science Discussion Paper No. 2006/13, Available at SSRN: https://ssrn.com/abstract=969292 or http://dx.doi.org/10.2139/ssrn.969292

Trond Døskeland (Contact Author)

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

Helge Nordahl

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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