A public guarantee of a minimum return to defined contribution pension scheme members
AbstractThe 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 InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 762.
Date of creation: Jun 2010
Date of revision:
defined contribution pension schemes; financial market tail risks; return guarantees; exchange option; ModiglianiÂ’s Treasury CFDB swap;
Find related papers by JEL classification:
- D10 - Microeconomics - - Household Behavior - - - General
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
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- 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".
- Giuseppe Marotta, 2011. "Are defined contribution pension schemes socially sustainable? A conceptual map from a macroprudential perspective," Department of Economics 0671, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
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