Interest rate models for pension and insurance regulation

Liabilities of pension funds and life insurers typically have very long times to maturity. The valuation of such liabilities introduces particular challenges as it relies on long term interest rates. As the market for long term interest rates is less liquid, financial institu¬tions and the regulator must rely, to some extent, on subjective parameters in regulation. An Ultimate Forward Rate is one way of dealing with the dependence on long term interest rates. We discuss two views with respect to the role of subjective parameters in regulation. These different views relate to the interpretation of a pension contract: a social contract or a financial contract. Furthermore, we assess the implications of different UFR proposals on managing liability risk.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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