Valuation of Liabilities in Hybrid Pension Plans

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.

Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011

“…As a robustness check, in Section 10 we also compute the NPVs using the forecast riskless rates, relying on the assumption that USS is backed by the UK university system, and so has minimal default risk. Using the riskless interest rate as the discount rate for valuing the liabilities of DB schemes is advocated by Broeders et al (2013), and has the advantage of allowing us to estimate the risks attached to expected changes in pension wealth.…”

Institutional disparities and asset allocation homologation in Italian defined contribution pension funds. How do they affect the guarantee commitment?

“…Until now, the functioning and the sustainability of DC guaranteed schemes have not been adequately explored, since previous analysis on this topic is basically theoretical. In particular, a number of research works analyze the risk related to guaranteed pension funds (Broeders et al ., 2013; Broeders and Chen, 2013) or estimate the theoretical cost of different type of guarantees (Pennacchi, 1998, 1999; Biggs et al ., 2009; Munnel et al . 2009; Grande and Visco, 2010; Antolìn et al ., 2011).…”