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GUARANTEE VALUATION IN NOTIONAL DEFINED CONTRIBUTION PENSION SYSTEMS

Published online by Cambridge University Press:  05 August 2016

Jennifer Alonso-García  and
Pierre Devolder
Jennifer Alonso-García*
Affiliation:
ARC Centre of Excellence in Population Ageing Research (CEPAR), School of Risk and Actuarial Studies, UNSW Business School, Level 3, East Wing, 223 Anzac Parade, Kensington NSW 2033, Australia
Pierre Devolder
Affiliation:
Faculty of Sciences, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA), Université Catholique de Louvain, Belgium E-Mail: [email protected]
*
E-Mail: [email protected]
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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 pensionpay-as-you-gooption pricingincomplete marketsexponential utility
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 46 , Issue 3 , September 2016 , pp. 677 - 707
Copyright
Copyright © Astin Bulletin 2016 

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