Pension fund risk management: Multi-stakeholders, risk management and the embedded options approach
Abstract
Pension funds have gradually become institutions where various stakeholders — retirees, employers and employees — share the risks. These risk-sharing agreements imply that various complex options, with different characteristics, are ‘traded’ within the pension fund. Different stakeholders assume different kinds and levels of risk that need to be valued and managed. The approach put forward in this paper aims to make the valuation and risk characteristics of these embedded options transparent. This approach is gaining importance as the new form of risk management for pension funds. It has important applications in solvency management, merger and acquisition activities, pension fund redesign and hedging pension fund risks. The exact structure of the models and the corresponding assumptions are to a large extent omitted in the text. The underlying research in this paper and the quantitative results are based on the author's book, ‘Curious Contracts. Pension Fund Redesign for the Future’. Anyone wishing to check the results or understand the quantitative modelling of embedded options can download the text, free of charge, from www.cardano.com.
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Author's Biography
Theo Kocken is the founder and CEO of Cardano. He holds a Bachelor’s degree in business administration, a master’s degree (cum laude) in econometrics and gained his PhD at the VU University (Amsterdam). Having been the author or co-author of numerous books and articles in the area of risk management and pension funds, he applied modern finance theories as a basis for pension fund redesign in his book ‘Curious Contracts. Pension Fund Redesign for the Future’ (2006). Theo expanded his expertise in derivatives and risk management as head of the market risk departments at ING and Rabobank International between 1990 and 2000. He founded Cardano in 2000, a company specialising in risk management and derivatives overlay for end users such as pension funds and life insurers.
Citation
Kocken, Theo (2009, March 1). Pension fund risk management: Multi-stakeholders, risk management and the embedded options approach. In the Journal of Risk Management in Financial Institutions, Volume 2, Issue 2. https://doi.org/10.69554/RDIX9596.
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