This thesis proposes a valuation method for the sponsor support option in defined benefit pension contracts, including an extensive implementation of sponsor’s default probabilities. The value of sponsor support option gives a clear view on the economic conditions and explicitly values the real economic risks of both the pension fund and the underlying company. The results show that risky investment strategies and the sponsor’s credit rating both have significant impact on the value of the sponsor support option, and vice versa. Besides that, not only the local characteristics of the pension fund and its underlying company themselves, but also broad market conditions affect the value of the sponsor support option. The current European debate about the introduction of real economic risks on pension fund’s holistic balance sheets confirms the importance of sponsor support option valuation for pension fund’s risk management. For regulatory purposes, this thesis concludes that the valuation of the sponsor support option may work counterproductive. Regulation based on false guarantees creates a downwards spiral that in the end will harm the pension’s participants.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

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