A public guarantee of a minimum return to defined contribution pension scheme members

Giuseppe Grande and Ignazio Visco ()
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Ignazio Visco: Bank of Italy

No 762, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The recent financial crisis has clearly demonstrated the exposure of defined contribution (DC) pension scheme members to extreme financial market risks. This paper argues that the government might offer DC plan members a minimum return guarantee, funded by risk based premia. Option pricing formulas show that the guarantee could be quite expensive, but public provision could reduce the costs borne by workers. Such an arrangement would be sustainable for the government and would give workers an acceptable benefit/contribution ratio in worst-case scenarios, while still allowing them to reap the advantages of occupational or individual funded pension schemes.

Keywords: defined contribution pension schemes; financial market tail risks; return guarantees; exchange option; Modigliani�s Treasury CFDB swap (search for similar items in EconPapers)
JEL-codes: D10 G23 H55 J14 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-age
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Citations: View citations in EconPapers (10)

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