Annals of Actuarial Science

Papers

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

Montserrat Guilléna1 c1, Agnieszka Karolina Konicza2, Jens Perch Nielsena3 and Ana M. Pérez-Marína4

a1 Department of Econometrics, Riskcenter-IREA, University of Barcelona, Barcelona, Spain

a2 Department of Management Engineering, Operations Research, Technical University of Denmark, Lyngby, Denmark

a3 Cass Business School, City University, London, United Kingdom

a4 Department of Econometrics, Riskcenter-IREA, University of Barcelona, Barcelona, Spain

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.

(Online publication October 08 2012)

Keywords

  • Retirement wealth;
  • pension fund performance measurement;
  • retirement saving schemes

Correspondence

c1 Correspondence to: Montserrat Guillén. Department of Econometrics, Riskcenter-IREA, University of Barcelona, Avinguda Diagonal, 690, E-08034 Barcelona, Spain. E-mail: mguillen@ub.edu