Minimum protection in DC funding pension plans and Margrabe options

The regulation on the Belgian occupational pension schemes has been recently changed. The new law allows for employers to choose between two different types of guarantees to offer to their affiliates. In this paper, we address the question arising naturally: which of the two guarantees is the best o...

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Bibliographic Details
Published in:Risks (Basel) 2017-03, Vol.5 (1), p.1-14
Main Authors: Devolder, Pierre, de Valeriola, Sébastien
Format: Article
Language:English
Subjects:
Defined Contributions
guaranteed rate
Margrabe formula
option theory
Pension plans
pensions
Prices
Stochastic models
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Summary:The regulation on the Belgian occupational pension schemes has been recently changed. The new law allows for employers to choose between two different types of guarantees to offer to their affiliates. In this paper, we address the question arising naturally: which of the two guarantees is the best one? In order to answer that question, we set up a stochastic model and use financial pricing tools to compare the methods. More specifically, we link the pension liabilities to a portfolio of financial assets and compute the price of exchange options through the Margrabe formula.
ISSN:2227-9091
2227-9091
DOI:10.3390/risks5010005