The holistic balance sheet: An analysis of benefit reduction and conditional indexation

  • Frans Wernekinck Frans Wernekinck

In this master thesis the aspects and importance of the options of conditional indexation and benefit reduction in the Holistic Balance Sheet approach are investigated. The value of these embedded options are not determined with the standard value-based Asset Liability Management (ALM) approach, but by taking the difference between a pension fund with and a pension fund without the options. The reason for the use of this new approach is that there is an interaction between the two options as well as a changing premium rate, whichinfluences the actual value of the options. It is found that this results in a value of the benefit reduction option between 1.9 and 7.7 percent of the liabilities and a value of the conditional indexation option between 1.5 and 6.7 percent of the liabilities, which means that these options are important to take into account inthe Holistic Balance Sheet. These values are dependent on certain parameters, namely: the length of the simulation horizon, the volatility of the underlying financial market, the current funding ratio and the investment strategy. However, the latter two are not important for the option of conditional indexation, because an increase in volatility only increases the height of the shocks andnot the number of times the option will be executed on average. Furthermore, it is found that using the approach presented in this thesis to determine the values of the options leads to lower option values as compared to the standard value-based ALM approach.

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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