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). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
189
Abstract Views
1,949
rank
217,456
PlumX Metrics