1887

OECD Working Papers on Finance, Insurance and Private Pensions

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.

English

The Role of Guarantees in Defined Contribution Pensions

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.

English

Keywords: put options, accumulation phase, pensions, defined contribution, minimum return guarantees, guarantees
JEL: G12: Financial Economics / General Financial Markets / Asset Pricing; Trading volume; Bond Interest Rates; G23: Financial Economics / Financial Institutions and Services / Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors; J26: Labor and Demographic Economics / Demand and Supply of Labor / Retirement; Retirement Policies
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error