The Study of Rate of Return Guarantees under Defined Contribution Pension Plans
Date Issued
2007
Date
2007
Author(s)
Tang, Chun-Hua
DOI
en-US
Abstract
This doctoral dissertation contains two essays to study the minimum rate of return guarantees embedded in defined contribution pension plans. The first essay derives the explicit formulae to value these guarantees. Different from previous studies, we analyze the guarantees linked to the delta-year spot rates. Two types of guarantees are considered: maturity guarantee and multi-period guarantee. These guarantees have mixed features of exchange options, path-dependent options and forward start options. We adopt the one-factor HJM model to describe the evolution of interest rates. The closed-form formulae are derived by the martingale pricing theory and Margrabe’s (1978) approach. We also present numerical results and analyze how the values change with the parameter estimates.
The second essay investigates how investment strategies and behaviors affect guarantee costs and retirement benefits in defined contribution plans that provide interest rate guarantees. Several investment strategies are considered, including both a buy-and-hold strategy without portfolio modifications and those that allow frequent modifications of the portfolio during the accumulation phase. According to the numerical results offered by simulation techniques, a participant chasing the highest expected retirement benefits should adopt the buy-and-hold strategy and distribute all contributions in the portfolio with high expected rate of return and high volatility in our guarantee designs. After incorporating frequent modification behaviors, averages and risk measures of guarantee costs may be higher than when the participant always holds the portfolio with high expected rate of return and volatility. Therefore, when the pension plan provides rate of return guarantees, the plan provider cannot ignore the impact of the participant’s frequent modification behaviors.
Subjects
確定提撥制
退休金計畫
收益率保證
平賭訂價理論
HJM模型
CIR模型
行為財務學
錯置效果
Defined Contribution
Pension Plan
Rate of Return Guarantee
Martingale Pricing Theory
HJM Model
CIR model
Behavioral Finance
Disposition Effect
Type
thesis
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