Pricing of participation option in Iran's Social Security Organization (ISSO)'s pension fund

Subject Areas : Labor and Demographic Economics

abbas khandan ¹ (Faculty of Economics, Kharazmi University.)
Erfan Salavati ² (Department of Mathematics and Computer Science, Amirkabir University of Technology)

Received: 2022-03-15 Accepted : 2022-09-06 Published : 2022-06-20

Keywords: Pricing, European option, American option, participation in pension funds,

Abstract :

Collective pension schemes with mandatory participation, despite their many benefits, are not commensurate with the future of work so that recently granting exit option has been considered in pension reforms. However, there are concerns about the consequences of granting exit option on sustainability of the plans. This study based on the main characteristics of Iran’s Social Security Organization (ISSO)’s pension fund, mathematically calculates the value of participation in this plan. It was assumed that contributors are allowed to opt out once at a given time (European option) or several times during employment (US option) and, then, the option pricing theory is used to determine the value of these options. Findings show that in both cases of European and American options, the incentive to leave generally is low at old ages and they prefer to stay and receive their entitled pension annually. In contrast, young people have less incentive to participate because they know that they are the ones who have to pay the high recovery contributions necessary to fill the deficit. However, it was shown that even young people are willing to accept a deficit (between 30 and 40 percent) because in case of participation, they would benefit from investment returns of their predecessors’ funds or other benefits of collective schemes including interpersonal and intergenerational risk sharing. The results also show that in case of American option, people have always higher participation incentive and its exit threshold is always lower than the case of European option.

References:

• سالاری، مصطفی، خندان، عباس، صداقت، محمدمهدی (1400). روابط مالی دولت و سازمان تأمین اجتماعی: مبانی نظری و حقوقی بیمه­های حمایتی، شکل­گیری و تأدیه بدهی­ها، مؤسسه عالی پژوهش تأمین اجتماعی، تهران.


• سازمان تأمین اجتماعی (1397). سالنامه آماری.


• Beetsma, R.M.W.J., Romp, W.E., & Vos, S.J. (2012). Voluntary participation and intergenerational risk sharing in a funded pension system. European Economic Review. 56(6), 1310–1324.


• Bernard, C., & Lemieux, C. (2008). Fast simulation of equity-linked life insurance contracts with a surrender option. Proceedings of 2008 Winter Simulation Conference.


• Boes, M.J., & Siegmann, A. (2018). Intergenerational risk sharing under loss averse preferences. Journal of Banking & Finance. 92, 269-279.


• Boon, L.N., Brière, M., & Werker, B.J.M. (2020). Systematic longevity risk: to bear or to insure? Journal of Pension Economics & Finance. 19(3), 409-441.


• Boyer, M., & Stentoft, L. (2013). If we can simulate it, we can insure it: An application to longevity risk management. Insurance: Mathematics & Economics. 52, 35–45.


• Broeders, D.W.G.A., Chen, A., & Rijsbergen, D.R. (2013). Valuation of liabilities in hybrid pension plans. Applied Financial Economics. 23(15), 1215-1229.


• Cathcart, M., & Morrison, S. (2009). Variable annuity economic capital: the leastsquares Monte Carlo approach. Life & Pensions. 44–48.


• Chen, D.H.J. (2015). Voluntary participation in a defined benefit pension scheme: An option pricing approach. Discussion Paper 11/2015-042, Netspar, Tilburg. Retrieved from https://www.netspar.nl/en/publication/voluntary-participation-in-a-defined-benefit-pension-scheme-an-option-pricing-approach/


• Chen, D.H.J., Beetsma, R.M.W.J, Broeders, D.W.G.A, & Pelsser, A.A.J. (2017). Sustainability of participation in collective pension schemes: An option pricing approach. Insurance: Mathematics & Economics. 74, 182-196.


• Chen, A., & Uzelac, F. (2015). Portability, Salary and Asset Price Risk: A Continuous-Time Expected Utility Comparison of DB and DC Pension Plans. Risks. 3(1), 77-102.


• Dawson, P., Dowd, K., Carins, A.J.G, & Blake, D.P. (2010). Survivor Derivatives: A Consistent Pricing Framework. Journal of Risk and Insurance. 77(3), 579-597.


• Lekniute, Z., Beetsma, R.M.W.J., & Ponds, E.H.M. (2014). A Value-Based Approach to the Redesign of US State Pension Plans. SSRN, retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2438637


• Molenaar, R., Peijnenburg, J., & Ponds, E. (2011). Should I stay or should I go? break even funding ratios for DB pension plan participants. Discussion Paper 04/2011-027, Netspar. Tilburg. Retrieved from https://research.tilburguniversity.edu/en/publications/should-i-stay-or-should-i-go-break-even-funding-ratios-for-db-pen


• OECD (2019). OECD Pensions at a Glance. Paris: OECD


• Romp W., & Beetsma R.M.W.J. (2020). Sustainability of pension systems with voluntary participation. Insurance: Mathematics and Economics. 93, 125-140.


• Siegmann, A. (2011). Minimum funding ratios for defined-benefit pension funds. Journal of Pension Economics & Finance. 10 (3), 417–434.


• Sullivan, M. (2019). Auto-enrolment grows globally. IPE Magazine. Retrieved from https://www.ipe.com/auto-enrolment-grows-globally/10029254.article


• Schumacher, J.M. (2019). A Note on Gollier’s Model for a Collective Pension Scheme. Journal of Pension Economics & Finance. Published online by Cambridge University Press.