In this paper we propose a new family of term-structure models based upon the Flesaker & Hughston (1996) positive-interest framework. We demonstrate that the models are ideally suited for use in long-term risk management as well as for shortterm derivative-pricing problems. In particular, the models can be parametrised in a way which gives sustained periods of both high and low interest rates, similar to the cycle lengths we have observed over the course of the 20th century in the UK and US.

This paper discusses the use of parametric models for the term structure of interest rates and their uses. The paper focuses on a potential problem which arises out of the use of certain models. In most cases the process of parameter estimation involves the minimization or maximization of a function (for example, least squares or maximum likelihood). In some cases this function can have a global minimum/maximum plus one or more local minima/maxima. As we progress through time this leads to a process under which parameter estimates and the fitted term structure can jump about in a way which is inconsistent with bond-price changes. Here a number of models are identified as susceptible to this sort of problem. A new descriptive model (the restricted-exponential model) is proposed under which it is proved that the likelihood and Bayesian posterior functions have unique maxima: both in a zerocoupon bond market and in a low-coupon bond market. A counterexample shows that this result can brea...

In this paper we investigate the effectiveness of the Minimum Funding Requirement (MFR) (pre-1999 version) under random future investment conditions. In particular, do the various liabilities calculated under the MFR deliver a suitable level of security to pension scheme members ? The paper considers active (and deferred) members and current pensioners separately. For active members, Monte Carlo simulation is used to compare how the proceeds arising from investment of the pre-1999 MFR liability in an equity-backed personal pension would compare with the deferred pension promised by the scheme. It is found that while there may be the intended 50% chance that the personal pension has a better outcome there are very substantial downside risks for younger members. Investment strategies based upon index-linked gilts are shown to result, on average, in lower personal pensions but they provide an extremely effective means of limiting the downside risks. For pensioners, Monte Carlo simulation ...

We consider the choices available to a defined contribution (DC) pension plan member at the time of retirement for conversion of his pension fund into a stream of retirement income. In particular, we compare the purchase at retirement age of a conventional life annuity (i.e., a bond-based investment) with distribution programmes involving differing exposures to equities during retirement. The residual fund at the time of the plan member's death can either be bequested to his estate or revert to the life office in exchange for the payment of survival credits while alive. The most important decision, in terms of cost to the plan member, is the level of equity investment. We also find that the optimal age to annuitise depends on the bequest utility and the investment performance of the fund during retirement.

Abstract not found

The authors thank an anonymous referee for helpful comments, and the BSI Gamma Foundation and We consider the choices available to a defined contribution (DC) pension plan member at the time of retirement for conversion of his pension fund into a stream of retirement income. In particular, we compare the purchase at retirement age of a conventional life annuity (i.e., a bond-based investment) with distribution programmes involving differing exposures to equities during retirement. The residual fund at the time of the plan member's death can either be bequested to his estate or revert to the life office in exchange for the payment of survival credits while alive. The most important decision, in terms of cost to the plan member, is the level of equity investment. We also find that the optimal age to annuitise depends on the bequest utility and the investment performance of the fund during retirement.

We consider the choices available to a defined contribution (DC) pension plan member at the time of retirement for conversion of his pension fund into a stream of retirement income. In particular, we compare the purchase at retirement age of a conventional life annuity (i.e., a bond-based investment) with distribution programmes involving differing exposures to equities during retirement. The residual fund at the time of the plan member’s death can either be bequested to his estate or revert to the life office in exchange for the payment of survival credits while alive. The most important decision, in terms of cost to the plan member, is the level of equity investment. We also find that the optimal age to annuitise depends on the bequest utility and the investment performance of the fund during retirement.

A family of term-structure models for long-term risk

enhancing the understanding of risk and insurance