Market valuation of pension liabilities
Date
2011-03-14
Authors
Greenwood, Mark
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
This dissertation analyses the market-consistent valuation of liabilities for
de¯ned-bene¯t pensions in payment. Models from the actuarial and ¯nan-
cial economics literature for valuation of in°ation options embedded in typical
liabilities in the South African market are considered. The feasibility of the
assumptions underpinning these models is then appraised and it is concluded
that, while existing models may produce reasonable market valuations for pen-
sion liabilities, these models are unable to capture important aspects of the
dynamics of the interest rate and in°ation markets. The market for pension
liabilities is incomplete due to background risks such as mortality, credit, reg-
ulatory and tax risks. Stochastic mortality models are considered and it is
described how an incomplete-market valuation of liabilities using risk-adjusted
pricing principles may be produced by extending an investment model to in-
clude mortality.