On Risk Charges and Shadow Account Options in Pension Funds
Journal
Scandinavian Actuarial Journal
Type
journal article
Date Issued
2014-01-15
Author(s)
Abstract
This paper studies the economic implications of regulatory systems which allow equityholders of pension
companies to not only charge a specific premium to compensate them for their higher risk (compared to
policyholders), but also to accumulate these risk charges in a so-called shadow account in years when they are
not immediately payable due to e.g. poor investment results.When surpluses are subsequently reestablished,
clearance of the shadow account balance takes priority over bonus/participation transfers to policyholders.
We see such a regulatory accounting rule as a valuable option to equityholders and our paper develops amodel
in which the influence of risk charges and shadow account options on stakeholders’ value can be quantified
and studied. Our numerical results show that the value of shadow account options can be significant and thus
come at the risk of expropriating policyholder wealth. However, our analysis also shows that this risk can be
remedied if proper attention is given to the specific contract design and to the fixing of fair contract parameters
at the outset.
companies to not only charge a specific premium to compensate them for their higher risk (compared to
policyholders), but also to accumulate these risk charges in a so-called shadow account in years when they are
not immediately payable due to e.g. poor investment results.When surpluses are subsequently reestablished,
clearance of the shadow account balance takes priority over bonus/participation transfers to policyholders.
We see such a regulatory accounting rule as a valuable option to equityholders and our paper develops amodel
in which the influence of risk charges and shadow account options on stakeholders’ value can be quantified
and studied. Our numerical results show that the value of shadow account options can be significant and thus
come at the risk of expropriating policyholder wealth. However, our analysis also shows that this risk can be
remedied if proper attention is given to the specific contract design and to the fixing of fair contract parameters
at the outset.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Volume
7
Number
2015
Start page
616
End page
639
Pages
24
Subject(s)
Division(s)
Eprints ID
255498