Pricing of a resettable guarantee of a salary-connected individual pension account

Abstract

The present paper numerically prices a resettable guarantee of a salary-connected individual pension account (IPA). The results indicate that a principal guarantee without a reset feature is not worth much unless the volatility of assets in the IPA is huge, while the death benefit contributes a very small proportion to the guarantee value. Deferred proportional funding is an alternative to reducing problems from the difficulty in modeling salary behavior, because the required deferred proportional cost is impacted less by the salary behavior. Moreover, if the lapse from a guarantee is possible, then the guarantee is not necessarily more valuable for a younger individual.