Magister Scientiae - MSc (Mathematics and Applied Mathematics)

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A mathematical model for managing equity-linked pensions
(University of the Western Cape, 2006) Julie, Elmerie
Pension fund companies manage and invest large amounts of money on behalf of their members. In return for their contributions, members expect a benefit at termination of their contract. Due to the volatile nature of returns that pension funds attain, pension companies started attaching a minimum guaranteed amount to member's benefits. In this mini-thesis we look at the pioneering work of Brennan and Schwartz [10] for pricing these minimum guarantees. The model they developed prices these minimum guarantees using option pricing theory. We also look at the model proposed by Deelstra et al. [13] which prices minimum guarantees in stochastic financial setting. We conclude this mini-thesis with new contributions where we look at simple alternative ways of pricing minimum guarantees. We conclude this mini-thesis with an approach, related to the work of Brenan and Schwartz [10], whereby the member's benefit is maximised for a given minimum guaranteed amount, which comprises of multi-period guarantees. We formulate a method to find the optimal stream of these multi-period guarantees.