Cardano is involved in several initiatives important to the pensions industry. Learn more about our involvement in the following projects:
- Hybrid Derivatives
- Value Transfers in Pensions
- The Currency Exchange Fund
- Hedging Longevity Risk
- IMQubator
Value Transfers and Embedded Options in Pensions
Risk sharing among stakeholders is one of the defining characteristics of pension funds. Defined Benefit (DB) plans typically include agreements ensuring that plan sponsors will put more money into the pension fund in case of a funding deficit. At the same time, pensioners and active members may bear some of this risk in case of the sponsor defaulting. Another form of risk sharing takes place if pension increases are only partially linked to inflation or. as in the Dutch case, if the link to inflation may be forgone whenever the funding level falls below a certain level.
The payoffs related to the risks borne by the various stakeholders are options, which stakeholders have written to the pension fund. Option pricing models may help determining the value of these options, which can be particularly helpful in M&A negotiations, pension fund buy-outs or pension fund redesign. This is highly relevant in today’s DB landscape in the UK, the Netherlands and other developed countries.
Ultimately, valuing the various options embedded in the pension fund may also help design pension systems which are robust for future changes in demography and market structure. The aim might be that each stakeholder will be fairly compensated for the risks borne in the pension fund.
The following link provides a more detailed treatment of value transfers and embedded options in pensions.
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