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Valuation of Liabilities in Hybrid Pension Plans

  • Dirk Broeders
  • An Chen
  • David Rijsbergen

In this paper we derive an analytic valuation formula for a generalized form of liabilities in hybrid pension plans taking account of both equity and interest rate risk. Comparative statistics are carried out to show the relevance of some key parameters in defining the hybrid pension plans, particularly the indicator of hybridity and the equity allocation in the pension fund's investment policy. We find that both the level of hybridity and the equity allocation of the pension fund impact the value of hybrid plan liabilities. This should affect the negotiation between employers and employees on total labor compensation.

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File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20326_tcm47-263701.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 326.

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Date of creation: Dec 2011
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Handle: RePEc:dnb:dnbwpp:326
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Greg Niehaus & Tong Yu, 2005. "Cash-Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 321-352.
  2. de Jong, Frank, 2008. "Pension fund investments and the valuation of liabilities under conditional indexation," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 1-13, February.
  3. Leora Friedberg & Anthony Webb, 2003. "Retirement and the Evolution of Pension Structure," NBER Working Papers 9999, National Bureau of Economic Research, Inc.
  4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  5. repec:ner:tilbur:urn:nbn:nl:ui:12-387570 is not listed on IDEAS
  6. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
  7. Dirk Broeders & An Chen, 2008. "Pension regulation and the market value of pension liabilities - a contingent claims analysis using Parisian options," DNB Working Papers 183, Netherlands Central Bank, Research Department.
  8. Johnson, Richard W. & Steuerle, Eugene, 2004. "Promoting work at older ages: the role of hybrid pension plans in an aging population," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(03), pages 315-337, November.
  9. Dirk Broeders, 2010. "Valuation of Contingent Pension Liabilities and Guarantees Under Sponsor Default Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 911-934.
  10. Coronado, Julia Lynn & Copeland, Philip C., 2004. "Cash balance pension plan conversions and the new economy," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(03), pages 297-314, November.
  11. Eduard Ponds & Bart van Riel, 2007. "The Recent Evolution of Pension Funds in the Netherlands: The Trend to Hybrid DB-DC Plans and Beyond," Working Papers, Center for Retirement Research at Boston College wp2007-9, Center for Retirement Research, revised Apr 2007.
  12. Grosen, Anders & Løchte Jørgensen, Peter, 2001. "Life Insurance Liabilities at Market Value," Finance Working Papers 01-4, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  13. Clark, Robert L. & Schieber, Sylvester J., 2004. "Adopting cash balance pension plans: implications and issues," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(03), pages 271-295, November.
  14. Laura Ballotta & Steven Haberman & Nan Wang, 2006. "Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 97-121.
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