183 - Pension regulation and the market value of pension liabilities - a contingent claims analysis using Parisian options

DNB Working Papers
Date 14 October 2008

We analyze the market-consistent valuation of pension liabilities in a contingent claim framework whereby a knock-out barrier feature is applied to capture early regulatory closure of a pension plan. We investigate two cases which we call “immediate closure procedure" and “delayed closure procedure". In an immediate closure procedure, when the assets value hits the regulatory boundary, the pension plan is terminated immediately. Whereas in a delayed closure procedure, a grace period is given to the pension fund plan for reorganization and recovery before premature closure is executed. The framework is then used to construct fair pension deals. Keywords: Pension funds; DB and DC pension plans, barrier options, Parisian barrier options. JEL: G11, G23