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Subjective value of the guarantees embedded in public cash-balance pension plans

Published online by Cambridge University Press:  23 February 2017

CHUN-HUA TANG
CHUN-HUA TANG*
Affiliation:
Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan (e-mail: [email protected])
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Abstract

Some public sectors provide cash-balance pension plans with guaranteed interest credits. We use the certainty-equivalence framework to derive the subjective value of the guarantee perceived by the participant. Numerical results show that in many scenarios the subjective value is lower than the cost of the guarantee derived by option pricing approaches, implying that public sectors potentially spend too much in providing the guarantee. However, the subjective value could be higher than the cost of the guarantee under some scenarios, depending on the participant's level of risk aversion, the feasibility of diversification, and so forth.

Keywords

H75I38Pension planscash-balancesubjective valueguaranteeinterest credits
Type
Article
Information
Journal of Pension Economics & Finance , Volume 17 , Issue 2 , April 2018 , pp. 231 - 250
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

I gratefully acknowledge the financial support from the Ministry of Science and Technology (formerly known as National Science Council) of Taiwan (NSC 98-2410-H-035-010).

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