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- Title
Paying for Minimum Interest Rate Guarantees: Who Should Compensate Who?
- Authors
Jensen, Bjarne Astrup; Sørensen, Carsten
- Abstract
Defined contribution pension schemes often have a mandatory minimum interest rate guarantee as an integrated part of the contract. The guarantee is an embedded put option issued by the institution to the individual who is forced to invest in the option. As argued in this paper, the individual may in this way face a constraint on the feasible set of portfolio choices. We quantify the effect of the minimum interest rate guarantee constraint and demonstrate that guarantees may induce a significant utility loss. We also consider the effects of the interest rate guarantee in the case of heterogenous investors sharing a common portfolio on a pro rata basis.
- Subjects
DEFINED contribution pension plans; INTEREST rates; GUARANTEED investment contracts
- Publication
European Financial Management, 2001, Vol 7, Issue 2
- ISSN
1354-7798
- Publication type
Article
- DOI
10.1111/1468-036x.00152