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Intergenerational Effects of Guaranteed Pension Contracts

Døskeland, Trond M.; Nordahl, Helge A.
Working paper
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URI
http://hdl.handle.net/11250/163893
Date
2006-09
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  • Discussion papers (FOR) [509]
Abstract
In this paper we show that there exist an intergenerational cross-subsidization effect 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.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2006:13

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