Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options |
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Authors: | Dirk Broeders An Chen |
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Affiliation: | 1. De Nederlandsche Bank (DNB), Strategy Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands;2. Netspar and Department of Economics, University of Bonn, Adenauerallee 24-42 53113, Germany |
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Abstract: | 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 for reorganization and recovery before premature closure is executed. The framework is then used to construct fair pension deals. Furthermore, we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability. |
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Keywords: | G11 G23 |
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