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Guarantee Valuation In Notional Defined Contribution Pension Systems

Author

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  • Alonso-García, Jennifer
  • Devolder, Pierre

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.

Suggested Citation

  • Alonso-García, Jennifer & Devolder, Pierre, 2016. "Guarantee Valuation In Notional Defined Contribution Pension Systems," ASTIN Bulletin, Cambridge University Press, vol. 46(3), pages 677-707, September.
    • Handle: RePEc:cup:astinb:v:46:y:2016:i:03:p:677-707_00
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    Cited by:

    1. Leung, Melvern & Fung, Man Chung & O’Hare, Colin, 2018. "A comparative study of pricing approaches for longevity instruments," Insurance: Mathematics and Economics, Elsevier, vol. 82(C), pages 95-116.
    2. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.

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