Pension Scheme with Bounds on Returns

In the Netherlands, reforms to the pension system are negotiated. One of the alternatives to the current system is establishing an explicit buffer fund through setting bounds on the returns of the individual pension schemes. This Master’s Thesis proposes a solution to imposing a self-financing property on this buffer fund in order to establish the viability of this new system. The payoffs of call and put options are exploited to form this buffer fund and an analytical approximation is derived to determine the bounds, which need to be set on the returns in the pension scheme in order to ensure a self-financing buffer fund.