326 - Valuation of Liabilities in Hybrid Pension Plans

DNB Working Papers
Publicatiedatum 15 december 2011

In this paper we derive an analytic valuation formula for a generalized form of liabilities in hybrid pension plans taking account of both equity and interest rate risk. 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. We find that both the level of hybridity and the equity allocation of the pension fund impact the value of hybrid plan liabilities. This should affect the negotiation between employers and employees on total labor compensation.

Keywords: Market consistent valuation, overlapping generations, forward risk adjusted measure, Vasiček.
JEL Codes: G12, G13, G23.