Guaranteeing Benefits in Generational Pension Plans

Abstract

In this paper we analyze the possibilities of intergenerational risk sharing in a generational DB pension fund. In a generational pension plan each generation has their own pension scheme and is subject to discretionary investment, indexation and contribution policies, thereby losing intergenerational diversification gains. Intergenerational risk sharing is repaired by introducing contingent claims on the generational surplus or deficit. Using risk-neutral valuation we find that in some circumstances the values of these options can be substantial.

Keywords: customization, collective pension plan, intergenerational risk sharing, contingent claims