Equity-Linked Pension Schemes with Guarantees

Nielsen, J. Aase; Sandmann, Klaus; Schlögl, Erik

doi:10.2139/ssrn.1344111

Equity-Linked Pension Schemes with Guarantees

31 Pages Posted: 19 Feb 2009

See all articles by J. Aase Nielsen

J. Aase Nielsen

Aarhus University - Department of Theoretical Statistics and Operations Research

Klaus Sandmann

University of Bonn - The Bonn Graduate School of Economics

University of Technology Sydney (UTS), Quantitative Finance Research Centre; University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management; Faculty of Science, Department of Statistics, University of Johannesburg; Financial Research Network (FIRN)

Date Written: February 15, 2009

Abstract

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

Nielsen, Jørgen Aase and Sandmann, Klaus and Schloegl, Erik, Equity-Linked Pension Schemes with Guarantees (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1344111 or http://dx.doi.org/10.2139/ssrn.1344111