Investment Risks and Returns of Hybrid Pension Plans: Sponsor and Member Perspectives

34 Pages Posted: 21 Sep 2006

See all articles by Peter Albrecht

Peter Albrecht

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

Joachim Coche

European Central Bank - Risk Management Division

Raimond Maurer

Goethe University Frankfurt - Finance Department

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: September 2006

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.

Keywords: Pension Plans, Investment Risks

JEL Classification: G22, G23

Suggested Citation

Albrecht, Peter and Coche, Joachim and Maurer, Raimond and Rogalla, Ralph, Investment Risks and Returns of Hybrid Pension Plans: Sponsor and Member Perspectives (September 2006). Available at SSRN: https://ssrn.com/abstract=931888 or http://dx.doi.org/10.2139/ssrn.931888

Peter Albrecht (Contact Author)

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

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Gr├╝neburgplatz 1
House of Finance
Frankfurt, 60323
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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