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The Role of Guarantees in Defined Contribution Pensions

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  • Pablo Antolín
  • Stéphanie Payet
  • Edward R. Whitehouse
  • Juan Yermo

Abstract

This paper examines the role of guarantees in DC pension plans, in particular minimum investment return guarantees during the accumulation phase. The main goal is to assess the cost and benefits of different return guarantees. The report uses a stochastic financial market model where guarantee claims are calculated as a financial derivative in a financial market framework (like e.g. the valuation of a put option). In this context, the report highlights the value of capital guarantees that protect the nominal value of contributions in DC pension plans. However, such guarantees can only be introduced relatively easily in the very specific context considered in this report. Allowing plan members vary contribution periods or investment strategies, or change providers, would raise major challenges for an effective and efficient implementation of return guarantees in a DC context. This would increase the complexity and cost of administering the guarantee. Le rôle de garanties dans les plans de retraite à cotisations définies Ce papier examine le rôle des garanties dans les plans de retraite à cotisations définies, en particulier les garanties de rendement minium sur l'investissement pendant la phase d'accumulation. Le rapport utilise un modèle de marché financier stochastique dans lequel les demandes de garantie sont calculées en tant que dérivés financiers dans un contexte de marché financier (comme par exemple la valorisation d'une option put). Dans ce contexte, le rapport souligne la valeur de la garantie du capital, qui protège la valeur nominale des cotisations aux plans de retraite à cotisations définies. Toutefois, ces garanties ne peuvent être introduites relativement facilement que dans le contexte spécifique de ce rapport. Si les adhérents des plans à cotisations définies sont autorisés à modifier les périodes de cotisation ou les stratégies d'investissement, ou à changer de prestataire, cela poserait des défis importants pour une implémentation efficace et efficiente des garanties sur les rendements. Cela augmenterait la complexité et le coût d'administration des garanties.

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File URL: http://dx.doi.org/10.1787/5kg52k5b0v9s-en
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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Working Papers on Finance, Insurance and Private Pensions with number 11.

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Date of creation: Sep 2011
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Handle: RePEc:oec:dafaad:11-en

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Related research

Keywords: guarantees; minimum return guarantees; accumulation phase; put options; pensions; defined contribution; plans de retraite à cotisations définies; garanties de rendement minimums; garanties; phase d’accumulation; pensions;

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Cited by:
  1. Queisser, Monika & Whitehouse, Edward, 2005. "Pensions at a glance: public policies across OECD countries," MPRA Paper 10907, University Library of Munich, Germany.

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