A Guaranteed-Return Structured Product as an Investment Risk-Hedging Instrument in Pension Savings Plans

This study proposes a novel structured product (SP) among the basket of financial products sold to pension fund members. The product offers to hedge defined contribution (DC) pension portfolio members against capital market risk. Based on trading risk-free government bonds and call options on a benchmark equity market index, the SP could guarantee a minimal rate of return to the member’s accumulated pension savings, and a percentage of the potential positive return of the benchmark index.The SP will enable pension members to increase the potential return on their accumulated savings without exposure to market volatility risk. The SP incentivizes both the pension institution, which is interested in obtaining a risk-free profit from the sale of the SP to pension members, and its members, who want to ensure their pension savings against declines in the capital market and increase the likelihood of a profit.We use Monte Carlo simulations on three different guaranteed returns to test the investment strategy of the SP against a balanced investment portfolio; we measure their performance across a wide variety of capital market returns and risk scenarios. The results show that the SP can guarantee a minimal return on the pension savings portfolio and offer a higher portfolio return at a lower investment risk than the balanced investment portfolio. We conclude that the SP might be an excellent investment alternative for pension fund members