Implications of Optimal Investment Policies for Hybrid Pension Plans: Sponsor and Member Perspectives

34 Pages Posted: 2 Nov 2005

See all articles by Raimond Maurer

Raimond Maurer

Goethe University Frankfurt - Finance Department

Peter Albrecht

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance

Joachim Coche

European Central Bank - Risk Management Division

Ralph Rogalla

St. John's University - Tobin College of Business - School of Risk Management, Insurance, and Actuarial Science; Goethe University Frankfurt - Department of Finance

Date Written: 2005

Abstract

This paper analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans which are optimal either from the perspective of the plan sponsor or the beneficiaries.

The focus is in particular on how the introduction of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on the return of the members' individual investment accounts affect investment decisions and plan costs. Within a comparative static analysis framework, it is shown that for low- to medium-risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees while for the latter costs increase exponentially with investment risk. The study also finds that the portfolio choice of the sponsor and the beneficiaries shows substantial differences depending on the exact plan design and the beneficiaries' risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries, and to keep pension plan costs under control.

Suggested Citation

Maurer, Raimond and Albrecht, Peter and Coche, Joachim and Rogalla, Ralph, Implications of Optimal Investment Policies for Hybrid Pension Plans: Sponsor and Member Perspectives (2005). Pension Research Council WP2005-11. Available at SSRN: https://ssrn.com/abstract=830024 or http://dx.doi.org/10.2139/ssrn.830024

Raimond Maurer (Contact Author)

Goethe University Frankfurt - Finance Department ( email )

Gr├╝neburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Peter Albrecht

University of Mannheim - Department of Risk Theory, Portfolio Management and Insurance ( email )

Schloss
Mannheim, D-68131
Germany

Joachim Coche

European Central Bank - Risk Management Division ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ralph Rogalla

St. John's University - Tobin College of Business - School of Risk Management, Insurance, and Actuarial Science ( email )

101 Astor Place
New York, NY 10003
United States

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

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