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Lifecycle derivatives and retirement income assurance using long-term debt

Published online by Cambridge University Press:  06 December 2007

ROGER J. BOWDEN
ROGER J. BOWDEN
Affiliation:
School of Economics and Finance, Victoria University of Wellington and Kiwicap Research Ltd, WellingtonNew Zealand (e-mails:[email protected]; [email protected]; fax:+64 4 472 4983)
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Abstract

As life tables continue to lengthen, a world-wide paradigm shift to defined contribution – but undefined rewards – has left pensioners exposed to performance, credit, and longevity risk. However, relatively risk-free defined benefit schemes can be designed off the back of high-grade debt issuance programmes by public long-term asset vehicles, as an infrastructure–retirement double play. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilize market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, one that exploits the externalities of a well-designed system of public debt.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 3 , July 2009 , pp. 361 - 390
Copyright
Copyright © 2007 Cambridge University Press

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