The shift from defined benefits (DB) to defined contributions (DC) is pervasive among pension fun... more The shift from defined benefits (DB) to defined contributions (DC) is pervasive among pension funds, due to demographic changes and macroeconomic pressures. In DB all risks are borne by the provider, while in plain vanilla DC all risks are borne by the beneficiary. For DC to provide income security some kind of guarantee is required. A minimum guarantee clause can be modeled as a put option written on some underlying reference portfolio of assets and we propose a discrete model that optimally selects the reference portfolio to minimise the cost of a guarantee. While the relation DB-DC is typically viewed as a binary one, the model setup can be used to price a wide range of guarantees creating a continuum between DB and DC. Integrating guarantee pricing with asset allocation decision is useful to both pension fund managers and regulators. The former are given a yardstick to assess if a given asset portfolio is fit-for-purpose; the latter can assess differences of specific reference funds with respect to the optimal one, signalling possible cases of moral hazard. We develop the model and report extensive numerical results to illustrate its potential uses.
In this brief account I will describe the experiences I accrue during the three months (February-... more In this brief account I will describe the experiences I accrue during the three months (February-April 2004) that I spent in Canberra, at the Australian National University, Department of Applied Mathematics. In this department I found the ideal working environment where physicists, chemists, engineers of materials and mathematicians cooperate in studies ranging from nano-technology to early fossil dating, including the study of graphs, granular materials, complex mesoscopic phases and disordered systems.
The shift from defined benefits (DB) to defined contributions (DC) is pervasive among pension fun... more The shift from defined benefits (DB) to defined contributions (DC) is pervasive among pension funds, due to demographic changes and macroeconomic pressures. In DB all risks are borne by the provider, while in plain vanilla DC all risks are borne by the beneficiary. For DC to provide income security some kind of guarantee is required. A minimum guarantee clause can be modeled as a put option written on some underlying reference portfolio of assets and we propose a discrete model that optimally selects the reference portfolio to minimise the cost of a guarantee. While the relation DB-DC is typically viewed as a binary one, the model setup can be used to price a wide range of guarantees creating a continuum between DB and DC. Integrating guarantee pricing with asset allocation decision is useful to both pension fund managers and regulators. The former are given a yardstick to assess if a given asset portfolio is fit-for-purpose; the latter can assess differences of specific reference funds with respect to the optimal one, signalling possible cases of moral hazard. We develop the model and report extensive numerical results to illustrate its potential uses.
In this brief account I will describe the experiences I accrue during the three months (February-... more In this brief account I will describe the experiences I accrue during the three months (February-April 2004) that I spent in Canberra, at the Australian National University, Department of Applied Mathematics. In this department I found the ideal working environment where physicists, chemists, engineers of materials and mathematicians cooperate in studies ranging from nano-technology to early fossil dating, including the study of graphs, granular materials, complex mesoscopic phases and disordered systems.
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