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

Listed author(s):
  • Giuseppe Grande

    ()

    (Bank of Italy)

  • Ignazio Visco

    ()

    (Bank of Italy)

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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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2010/2010-0762/en_tema_762.pdf
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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
Handle: RePEc:bdi:wptemi:td_762_10
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  9. Bodie, Zvi, 1990. "Pensions as Retirement Income Insurance," Journal of Economic Literature, American Economic Association, vol. 28(1), pages 28-49, March.
  10. Giovanni Guazzarotti & Pietro Tommasino, 2008. "The Annuity Market in an Evolving Pension System: Lessons from Italy," CeRP Working Papers 77, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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  18. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
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  23. Martin Feldstein & Elena Ranguelova, 2001. "Accumulated Pension Collars: A Market Approach to Reducing the Risk of Investment-Based Social Security Reform," NBER Chapters,in: Tax Policy and the Economy, Volume 15, pages 149-166 National Bureau of Economic Research, Inc.
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  25. Blake, David & Cairns, Andrew & Dowd, Kevin, 2008. "Turning pension plans into pension planes: What investment strategy designers of defined contribution pension plans can learn from commercial aircraft designers," MPRA Paper 33749, University Library of Munich, Germany.
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