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Do not pay for a Danish interest guarantee. The law of the triple blow

Published online by Cambridge University Press:  08 October 2012

Montserrat Guillén ,
Agnieszka Karolina Konicz ,
Jens Perch Nielsen  and
Ana M. Pérez-Marín
Montserrat Guillén*
Affiliation:
Department of Econometrics, Riskcenter-IREA, University of Barcelona, Barcelona, Spain
Agnieszka Karolina Konicz
Affiliation:
Department of Management Engineering, Operations Research, Technical University of Denmark, Lyngby, Denmark
Jens Perch Nielsen
Affiliation:
Cass Business School, City University, London, United Kingdom
Ana M. Pérez-Marín
Affiliation:
Department of Econometrics, Riskcenter-IREA, University of Barcelona, Barcelona, Spain
*
*Correspondence to: Montserrat Guillén. Department of Econometrics, Riskcenter-IREA, University of Barcelona, Avinguda Diagonal, 690, E-08034 Barcelona, Spain. E-mail: [email protected]
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Abstract

We have investigated the performance of pension schemes of with-profit policies containing a guaranteed minimum rate of return and we have found that the price of the guarantee measured in terms of lost returns is enormous. We use simple simulations rather than complex pricing methods to illustrate that the price of an interest guarantee is high in pension products that are currently commercialised in the market. We have found that the customer loses up to about 0.75% yearly in the rate of return when an interest guarantee is purchased, compared to the return of an equivalent saving strategy with the same risk at the level 95%. This can explain why such arrangements are not widely popular. Our approach can be used to inform clients, who are not experts in modern financial models, the impact of paying for an interest guarantee.

Keywords

Retirement wealthpension fund performance measurementretirement saving schemes
Type
Papers
Information
Annals of Actuarial Science , Volume 7 , Issue 2 , September 2013 , pp. 192 - 209
Copyright
Copyright © Institute and Faculty of Actuaries 2012 

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