nr 067 - Valuation of pension liabilities in incomplete markets

DNB Working Papers
Date 12 December 2005

This paper discusses the valuation of wage-indexed pension fund liabilities. Valuation by replication with market instruments is typically not possible as there are no wage-indexed assets. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor that can be used to calculate the value of wage indexed liabilities. JEL Code: G1, G23. Keywords: incomplete markets, pension funds.