Evaluating Interest Rate Guarantee for a Defined Contribution Pension Plan: The Effects of Investment Strategies on Guaranteed Cost and Income Replacement Ratio
Date Issued
2007
Date
2007
Author(s)
Liao, Wei-Chih
Abstract
The paper focuses on evaluating interest rate guarantee cost and income replacement ratio for a defined contribution (DC) pension within different investment strategies. We investigated the guarantee cost with different investing strategies, including Buy and hold (BH) Constant Mixture (CM), Deterministic Lifestyle (DL), Constant Portion Portfolio Insurance (CPPI) and Time Invariant Portfolio Protection (TIPP) strategies. We used the Monte Carlo simulation to evaluate stock prices, bond prices and interest rates. We also assumed that the stochastic process can be applied to our model where we use Geometric Brownian Motion to execute the stock and bond value simulations. We also apply the CIR model to simulate bond prices and interest rates as another bond price simulation method for comparison purposes. Additionally, in this paper, we also enlarged the parameters on different pre-set weightings, risk multiples and floor rates to understand the latent impacts on guarantee cost and income replacement ratio in the sensitive analysis section. According to simulation results, we conclude by suggesting that government and insurance companies to design products with TIPP and DL traits rather than CIPP trait to lower the guarantee cost.
Subjects
New Labor Pension
Structure Notes
Defined Contribution (DC)
Guarantee Cos
Income Replacement Ratio
Buy and hold (BH)
Constant Mixture (CM)
Deterministic Lifestyle (DL)
Constant Portion Portfolio Insurance (CPPI) and Time Invariant Portfolio Protection (TIPP) strategies
Type
thesis
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