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Pension saving schemes with return smoothing mechanism

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  • Goecke, Oskar

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.

Suggested Citation

  • Goecke, Oskar, 2013. "Pension saving schemes with return smoothing mechanism," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 678-689.
  • Handle: RePEc:eee:insuma:v:53:y:2013:i:3:p:678-689
    DOI: 10.1016/j.insmatheco.2013.09.010
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    Cited by:

    1. Ruß, Jochen & Schelling, Stefan, 2021. "Return smoothing in life insurance from a client perspective," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 91-106.
    2. Boonen, Tim J. & De Waegenaere, Anja, 2017. "Intergenerational risk sharing in closing pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 20-30.
    3. Andreas Richter & Jochen Ruß & Stefan Schelling, 2019. "Insurance customer behavior: Lessons from behavioral economics," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 183-205, July.
    4. Goecke, Oskar, 2018. "Resilience and Intergenerational Fairness in Collective Defined Contribution Pension Funds," Forschung am ivwKöln 7/2018, Technische Hochschule Köln – University of Applied Sciences, Institute for Insurance Studies.
    5. Goecke, Oskar, 2015. "Asset Liability-Management in einem selbstfinanzierenden Pensionsfonds," Forschung am ivwKöln 9/2015, Technische Hochschule Köln – University of Applied Sciences, Institute for Insurance Studies.
    6. Alexander Bohnert, 2015. "The Impact of Guarantees on the Performance of Pension Saving Schemes: Insights from the Literature," Risks, MDPI, vol. 3(4), pages 1-28, November.
    7. Bohnert, Alexander & Gatzert, Nadine & Jørgensen, Peter Løchte, 2015. "On the management of life insurance company risk by strategic choice of product mix, investment strategy and surplus appropriation schemes," Insurance: Mathematics and Economics, Elsevier, vol. 60(C), pages 83-97.
    8. M. Carmen Boado-Penas & Julia Eisenberg & Paul Kruhner, 2019. "Maximising with-profit pensions without guarantees," Papers 1912.11858, arXiv.org.
    9. Wang, Suxin & Lu, Yi, 2019. "Optimal investment strategies and risk-sharing arrangements for a hybrid pension plan," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 46-62.
    10. An Chen & Motonobu Kanagawa & Fangyuan Zhang, 2021. "Intergenerational risk sharing in a Defined Contribution pension system: analysis with Bayesian optimization," Papers 2106.13644, arXiv.org, revised Jun 2022.

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