Equity-Linked Pension Schemes with Guarantees
31 Pages Posted: 19 Feb 2009
Date Written: February 15, 2009
This paper analyses the relationship between the level of a return guarantee in an equity-linked pension scheme and the proportion of an investor's contribution needed to finance this guarantee. Three types of schemes are considered: investment guarantee, contribution guarantee and participation surplus. The evaluation of each scheme involves pricing an Asian option, for which relatively tight upper and lower bounds can be calculated in a numerically efficient manner.
We find a negative (and for two contract specifications also concave) relationship between the participation in the surplus return of the investment strategy and the guarantee level in terms of a minimum rate of return. Furthermore, the introduction of a possibility of early termination of the contract (e.g. due to the death of the investor) has no qualitative and very little quantitative impact on this relationship.
Keywords: Pension funds, forward risk adjusted measure, Asian option
JEL Classification: G13, G23
Suggested Citation: Suggested Citation
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By V.r. Young