Intergenerational Effects of Guaranteed Pension Contracts

Trond Døskeland () and Helge Nordahl ()

No 2006/13, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: In this paper we show that there exist intergenerational cross-subsidization effects in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation.

Keywords: Portfolio Choice; Life and Pension Insurance; Interest Rate Guarantees (search for similar items in EconPapers)
JEL-codes: G11 G13 G22 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-10-18, Revised 2007-06-21
New Economics Papers: this item is included in nep-fin and nep-ias
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Related works:
Journal Article: Intergenerational Effects of Guaranteed Pension Contracts (2008)
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