Return distributions of equity-linked retirement plans

Abstract

In the recent years an increasing demand for capital guaranteed equity-linked life insurance products and retirement plans has emerged. In Germany, a retirement plan, called Riester-Rente, is supported by the state with cash payments and tax benefits. Those retirement plans have to preserve the invested capital. The company offering a Riester-Rente has to ensure that at the end of the saving period at least all cash inflows are available. Due to the investors demand for high returns, banks and insurance companies are not only offering saving plans investing in riskless bonds but also in products with a high equity proportion. For companies offering an equity-linked Riester-Rente the guarantee to pay out at least the invested capital is a big challenge. Due to the long maturities of the contracts of more than 30 years it is not possible to just buy a protective put. Many different concepts are used by banks and insurance companies to generate this guarantee or to reduce the remaining risk for the company. They vary from simple Stop Loss strategies to complex dynamic hedging strategies. In our work we analyze the return distribution generated by some of these strategies.