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Restructuring Retirement Risks$
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David Blitzstein, Olivia S. Mitchell, and Stephen P. Utkus

Print publication date: 2006

Print ISBN-13: 9780199204656

Published to Oxford Scholarship Online: September 2006

DOI: 10.1093/0199204659.001.0001

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Chapter Chapter Understanding and Allocating Investment Risks in a Hybrid Pension Plan

Chapter Chapter Understanding and Allocating Investment Risks in a Hybrid Pension Plan

Chapter:
(p.204) Chapter 11 Understanding and Allocating Investment Risks in a Hybrid Pension Plan
Source:
Restructuring Retirement Risks
Author(s):

Peter Albrecht

Joachim Coche

Raimond Maurer

Ralph Rogalla

Publisher:
Oxford University Press
DOI:10.1093/0199204659.003.0011

This chapter analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans, which are optimal either from the perspective of the plan sponsor or the beneficiaries. It evaluates the impact of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on members’ investment returns. For low/medium risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees, but for the latter, costs increase exponentially with investment risk. It is also shown that the sponsor’s portfolio choice differs from that of the participants, depending on plan design and risk aversion. One way to resolve these differences is to combine minimum return guarantees and caps on investment returns, which shares investment risks and returns more equally between sponsor and beneficiaries, and keeps pension plan costs under control.

Keywords:   minimum guarantees, pension costs, investment limits, risk-return tradeoff

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