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Pension saving schemes with return smoothing mechanism

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  • Goecke, Oskar
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    Abstract

    The smoothing of capital market returns is possible if the pension plan allows for some kind of intergenerational risk transfer. This can be realized if the total of assets of the pension fund is not fully allocated to individual saving accounts but part of the assets is allocated to a collective reserve (unallocated fund). High capital returns are then used to feed the collective reserve while poor capital market returns (or even losses) are compensated by withdrawals from the collective reserve. Traditional with-profit (or participation) life insurance contracts are basically designed in this way; however in most cases the smoothing process is quite opaque and leaves room for opportunistic management decisions. We introduce a continuous time model to discuss two questions: firstly, what kind of benefit do pension savers draw from a return smoothing mechanism and secondly, how should the smoothing mechanism be steered in order to maximize the benefit for the savers. We will derive limit distributions for the smoothed return process and discuss the risk return profile of smoothed pension schemes.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 53 (2013)
    Issue (Month): 3 ()
    Pages: 678-689

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    Handle: RePEc:eee:insuma:v:53:y:2013:i:3:p:678-689

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: Collective saving; Intergenerational risk transfer; Return smoothing mechanism; Fair profit participation; Risk neutral evaluation; Limit distribution; Inverse gamma distribution; Risk return profile;

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    1. Grosen, Anders & Lochte Jorgensen, Peter, 2000. "Fair valuation of life insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies," Insurance: Mathematics and Economics, Elsevier, vol. 26(1), pages 37-57, February.
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    3. Anna Rita Bacinello, 2003. "Fair Valuation of a Guaranteed Life Insurance Participating Contract Embedding a Surrender Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 461-487.
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    7. Trond M D�skeland & Helge A Nordahl, 2008. "Intergenerational Effects of Guaranteed Pension Contracts," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 33(1), pages 19-46, June.
    8. Zemp, Alexandra, 2011. "Risk comparison of different bonus distribution approaches in participating life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 249-264, September.
    9. Graf, Stefan & Kling, Alexander & Ruß, Jochen, 2011. "Risk analysis and valuation of life insurance contracts: Combining actuarial and financial approaches," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 115-125, July.
    10. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 37(2), pages 185-202, November.
    11. Schmeiser, H. & Wagner, J., 2011. "A joint valuation of premium payment and surrender options in participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 580-596.
    12. Bohnert, Alexander & Gatzert, Nadine, 2012. "Analyzing surplus appropriation schemes in participating life insurance from the insurer’s and the policyholder’s perspective," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 64-78.
    13. Barbarin, Jerome & Devolder, Pierre, 2005. "Risk measure and fair valuation of an investment guarantee in life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 297-323, October.
    14. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April.
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