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

Publication: Research - peer-reviewJournal article – Annual report year: 2012

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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.
Original languageEnglish
JournalAnnals of Actuarial Science
Publication date2013
Volume7
Issue2
Pages192-209
Number of pages18
ISSN1748-4995
DOIs
StatePublished
CitationsWeb of Science® Times Cited: No match on DOI

Keywords

  • Retirement wealth, Pension fund performance measurement, Retirement saving schemes
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