Maximizing with-profit pensions without guarantees

Pension providers are currently running into trouble mainly due to the ultra-low interest rates and the guarantees associated to some pension benefits. In this paper, we aim to reduce the pension volatility and provide adequate pension levels—with no guarantees—through a new pension design. Under this design, the individual's premium is split into an individual and a collective account, both invested in funds. When the return from the individual fund exceeds a predefined corridor, a certain number of units is transferred to or from the collective account. In this way, the volatility of the individual fund is smoothed. By controlling the corridor width, we maximize the total accumulated capital at retirement.