Derivatives, Debt and Defined Benefits in National Retirement Policy

As the cost of funding baby boomer retirement under defined benefit schemes has become apparent, the resulting paradigm shift to defined contribution - but undefined rewards - has left pensioners exposed to performance, credit, and time to death risk, looming ever larger as life tables lengthen. It is argued that defined benefit schemes can be designed off the back of high grade debt issuance programmes, that might be used to finance long term public asset vehicles and resolve agency problems in public retirement provision. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilise market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, that exploits the externalities of a well-designed system of public debt.