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Pension saving schemes with return smoothing mechanism

  • Goecke, Oskar
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668713001431
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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    1. 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.
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    7. 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.
    8. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
    9. Døskeland, Trond M. & Nordahl, Helge A., 2006. "Intergenerational Effects of Guaranteed Pension Contracts," Discussion Papers 2006/13, Department of Business and Management Science, Norwegian School of Economics, revised 21 Jun 2007.
    10. 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.
    11. Ed Westerhout, 2011. "Intergenerational Risk Sharing in Time-Consistent Funded Pension Schemes," CPB Discussion Paper 176, CPB Netherlands Bureau for Economic Policy Analysis.
    12. Bjarke Jensen & Peter L�chte J�rgensen & Anders Grosen, 2001. "A Finite Difference Approach to the Valuation of Path Dependent Life Insurance Liabilities," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 26(1), pages 57-84, June.
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