Paying for Minimum Interest Rate Guarantees: Who Should Compensate Who?

36 Pages Posted: 3 Nov 2000

See all articles by Bjarne Astrup Jensen

Bjarne Astrup Jensen

Copenhagen Business School - Department of Finance

Carsten Sørensen

Copenhagen Business School - Department of Finance

Date Written: undated

Abstract

Defined contribution pension schemes often have a mandatory minimum interest rate guarantee as an integrated part of the contract. The guarantee is an embedded put option issued by the institution to the individual who is forced to invest in the option. As argued in this paper, the individual may in this way face a constraint on the feasible set of portfolio choices. We quantify the effect of the minimum interest rate guarantee constraint and demonstrate that guarantees may induce a significant utility loss. We also consider the effects of the interest rate guarantee in the case of heterogenous investors sharing a common portfolio on a pro rata basis.

Keywords: Minimum interest rate guarantee, asset allocation restrictions, utility loss

JEL Classification: G11, G13

Suggested Citation

Jensen, Bjarne Astrup and Sørensen, Carsten, Paying for Minimum Interest Rate Guarantees: Who Should Compensate Who? (undated). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=245932 or http://dx.doi.org/10.2139/ssrn.245932

Bjarne Astrup Jensen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Carsten Sørensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
178
rank
165,796
Abstract Views
1,467
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information