Liabilities of pension funds and life insurers typically have very long times to maturity. The valuation of such liabilities introduces particular challenges as it relies on long term interest rates. As the market for long term interest rates is less liquid, financial institutions and the regulator must rely, to some extent, on subjective parameters in regulation. An Ultimate Forward Rate is one way of dealing with the dependence on long term interest rates. We discuss two views with respect to the role of subjective parameters in regulation. These different views relate to the interpretation of a pension contract: a social contract or a financial contract. Furthermore, we assess the implications of different UFR proposals on managing liability risk.
|Number of pages||39|
|Volume||Design Paper 56|
|Publication status||Published - 31 May 2016|
|Series||Netspar Industry Paper Series|