Risk Allocation in Hybrid Pension Plans

Abstract

Three different hybrid designs are considered in this thesis. Chapter 1 studies the risk management of Cash Balance (CB) pension plans, which are the most popular hybrid plans in the U.S. We show that the simple delta and gamma hedging is effective in mitigating the interest rate risk embedded in the CB liabilities. Chapter 2 introduces a new pension design based on two existing hybrid plans - the second election option and the Defined Benefit underpin plan. We demonstrate how our new plan is able to provide more income security to the retirees without incurring large costs on top of the other two existing hybrid plans. Chapter 3 explores the optimal design for intergenerational risk-sharing (IRS) plans. We demonstrate the necessity to incorporate regulatory constraints to ensure generational fairness. The last chapter concludes the thesis and proposes future work in hybrid pension designs.