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Valuation of Liabilities in Hybrid Pension Plans

Author

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  • Dirk Broeders
  • An Chen
  • David Rijsbergen

Abstract

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.

Suggested Citation

  • Dirk Broeders & An Chen & David Rijsbergen, 2011. "Valuation of Liabilities in Hybrid Pension Plans," DNB Working Papers 326, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:326
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    File URL: https://www.dnb.nl/en/binaries/Working%20Paper%20326_tcm47-263701.pdf
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    References listed on IDEAS

    as
    1. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    2. 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.
    3. Broeders, Dirk & Chen, An, 2010. "Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1201-1214, June.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
    11. 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.
    12. 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.
    13. 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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    Cited by:

    1. Platanakis, Emmanouil & Sutcliffe, Charles, 2016. "Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 14-28.
    2. Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers 414, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Market consistent valuation; overlapping generations; forward risk adjusted measure; Vasicek;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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