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Selected studies on finance, insurance and private pensions policy prepared for dissemination in order to stimulate wider discussion and further analysis and obtain feedback from interested audiences. The studies provide timely analysis and background on industry developments, structural issues, and public policy in the financial sector. Topics include risk management, governance, investments, benefit protection, and financial education. Previous papers addressing these policy issues are available via http://dx.doi.org/10.1787/19936397.
The Role of Guarantees in Defined Contribution Pensions
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- Pablo Antolín, Stéphanie Payet1, Edward R. Whitehouse1, Juan Yermo1
- Author Affiliations
- 1: OECD, France
- 01 Sep 2011
- Bibliographic information
This paper examines the role of guarantees in DC pension plans, in particular minimum investment return guarantees during the accumulation phase. The main goal is to assess the cost and benefits of different return guarantees. The report uses a stochastic financial market model where guarantee claims are calculated as a financial derivative in a financial market framework (like e.g. the valuation of a put option). In this context, the report highlights the value of capital guarantees that protect the nominal value of contributions in DC pension plans. However, such guarantees can only be introduced relatively easily in the very specific context considered in this report. Allowing plan members vary contribution periods or investment strategies, or change providers, would raise major challenges for an effective and efficient implementation of return guarantees in a DC context. This would increase the complexity and cost of administering the guarantee.
- put options, accumulation phase, guarantees, defined contribution, minimum return guarantees, pensions
- JEL Classification:
- G12: Financial Economics / General Financial Markets / Asset Pricing ; Trading Volume ; Bond Interest Rates
- G23: Financial Economics / Financial Institutions and Services / Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors
- J26: Labor and Demographic Economics / Demand and Supply of Labor / Retirement ; Retirement Policies