Investment risk with guarantees after retirement?

Peter Schotman, Mark Irwin, Peter Dekkers, Roderick Molenaar

Research output: Book/ReportReportProfessional

Abstract

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 contributionInvestment risk with guarantees after retirement?
Original languageDutch
PublisherNetspar Design paper
Number of pages52
Volume153
Publication statusPublished - 1 Jul 2020

Publication series

SeriesNetspar Design Paper
Number153

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