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A public guarantee of a minimum return to defined contribution pension scheme members

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  • Giuseppe Grande

    ()
    (Bank of Italy)

  • Ignazio Visco

    ()
    (Bank of Italy)

Abstract

The recent financial crisis has clearly demonstrated the exposure of defined contribution (DC) pension scheme members to extreme financial market risks. This paper argues that the government might offer DC plan members a minimum return guarantee, funded by risk based premia. Option pricing formulas show that the guarantee could be quite expensive, but public provision could reduce the costs borne by workers. Such an arrangement would be sustainable for the government and would give workers an acceptable benefit/contribution ratio in worst-case scenarios, while still allowing them to reap the advantages of occupational or individual funded pension schemes.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 762.

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Date of creation: Jun 2010
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Handle: RePEc:bdi:wptemi:td_762_10

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Web page: http://www.bancaditalia.it
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Related research

Keywords: defined contribution pension schemes; financial market tail risks; return guarantees; exchange option; ModiglianiÂ’s Treasury CFDB swap;

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Cited by:
  1. Giuseppe Marotta, 2011. "Are defined contribution pension schemes socially sustainable? A conceptual map from a macroprudential perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 11101, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".

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