We consider two extensions of a standard contract under the Dutch Wvp regulation. These contracts allow for limited investment risk after retirement. One extension is interest rate risk. The standard contract specifications assume a constant flat term structure. We introduce interest rate risk and show how interest rate shocks affect pension payments and how this risk can be partially hedged. The other extension concerns a minimum payout guarantee. The Wvp contract resembles a variable annuity with time-varying exposure to investment risk. Combining it with elements of a fixed annuity creates a lower bound on pension payments, for example at 75% of a fixed annuity. This provides a robust payoff function when risk aversion and time preference of participants in the pension scheme cannot be measured accurately.
|Translated title of the contribution||Investment risk with guarantees after retirement?|
|Publisher||Netspar Design paper|
|Number of pages||52|
|Publication status||Published - 1 Jul 2020|
|Series||Netspar Design Paper|
Schotman, P., Irwin, M., Dekkers, P., & Molenaar, R. (2020). Doorbeleggen met garanties? Netspar Design paper. Netspar Design Paper, No. 153 https://www.netspar.nl/en/publication/investment-risk-with-guarantees-after-retirement/