Valuation of liabilities in hybrid pension plans

  • Broeders D
  • Chen A
  • Rijsbergen D
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Abstract

Contemporary pension plans are often hybrid pension plans, a mixture of defined benefit and defined contribution plans. In this article, we model a continuum of stylized hybrid pension plans in a run-off pension fund and value these pension liabilities taking account of both equity and interest rate risk. We achieve analytic valuation formulae and examine how the liability evolves over time. Comparative statistics are carried out to show the relevance of some key parameters in defining the hybrid pension plans, particularly the indicator of hybridity and the equity allocation in the pension fund's investment policy.
Contemporary pension plans are often hybrid pension plans, a mixture of defined benefit and defined contribution plans. In this article, we model a continuum of stylized hybrid pension plans in a run-off pension fund and value these pension liabilities taking account of both equity and interest rate risk. We achieve analytic valuation formulae and examine how the liability evolves over time. Comparative statistics are carried out to show the relevance of some key parameters in defining the hybrid pension plans, particularly the indicator of hybridity and the equity allocation in the pension fund's investment policy.

Author-supplied keywords

  • Vasicek
  • forward-risk-adjusted measure
  • market consistent valuation
  • overlapping generations

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