Subjective value of the guarantees embedded in public cash-balance pension plans

Chun-Hua Tang

Journal of Pension Economics and Finance, 2018, vol. 17, issue 2, 231-250

Abstract: Some public sectors provide cash-balance pension plans with guaranteed interest credits. We use the certainty-equivalence framework to derive the subjective value of the guarantee perceived by the participant. Numerical results show that in many scenarios the subjective value is lower than the cost of the guarantee derived by option pricing approaches, implying that public sectors potentially spend too much in providing the guarantee. However, the subjective value could be higher than the cost of the guarantee under some scenarios, depending on the participant's level of risk aversion, the feasibility of diversification, and so forth.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jpenef:v:17:y:2018:i:02:p:231-250_00

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