Intergenerational Effects of Guaranteed Pension Contracts |
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Authors: | Trond M Døskeland Helge A Nordahl |
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Institution: | 1.Department of Finance and Management Science,Norwegian School of Economics and Business Administration,Bergen,Norway |
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Abstract: | In this paper we show that there exist intergenerational cross-subsidization effects in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation. |
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