Guarantee Valuation in Notional Defined Contribution Pension Systems

ASTIN Bulletin, vol. 46, pp. 677-707, DOI: org/10.1017/asb.2016.21

30 Pages Posted: 10 Dec 2015 Last revised: 10 Feb 2017

See all articles by Jennifer Alonso-García

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research

Pierre Devolder

Catholic University of Louvain

Date Written: August 5, 2016

Abstract

The notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here, we provide a minimum return guarantee to the pension contributions. The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

Keywords: Public pension, pay-as-you-go, option pricing, incomplete markets, exponential utility

Suggested Citation

Alonso-García, Jennifer and Devolder, Pierre, Guarantee Valuation in Notional Defined Contribution Pension Systems (August 5, 2016). ASTIN Bulletin, vol. 46, pp. 677-707, DOI: org/10.1017/asb.2016.21. Available at SSRN: https://ssrn.com/abstract=2701655 or http://dx.doi.org/10.2139/ssrn.2701655

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Pierre Devolder

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

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