- Voluntary Participation in a Defined Benefit Pension Scheme
- An Option Pricing Approach
- Number of pages
- Netspar Discussion Paper
- Volume | Edition (Serie)
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper evaluates an American pension option, whereby participants have the option to convert their defined benefit (DB) pension entitlements of a collective scheme to an individual defined contribution (DC) plan, using contingent claim analysis. This way, we can evaluate the participation decisions under a voluntary collective pension scheme. We approximate the value of this option with risky investment returns by applying Least Squares Monte Carlo simulations as proposed by Longstaff and Schwartz (2001). When more decision dates are included, generations are more willing to participate in the collective pension scheme. If the funding rate falls below a critical value, some young generations will exercise the option. As a result, other generations might be willing to leave as well, which results in a collapse of the collective pension scheme.
In the absence of mandatory participation, it is only a matter of time before such a break down occurs.
- 23rd November 2015
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.