Pricing Pension Benefit Guaranteesby Term Structure Modelst

This paper presents a valuation model for pension benefit guarantees based on discrete timeapproximations of one and two factor models of the term structure, based on the pricing modelsof Ho and Lee (1986), Hull and White (1994a) and (1994b), and Heath, Jarrow, Morton(1991). It is shown that pension benefit guarantees are similar to American put options on theassets of pension funds. However, there is a significant difference: Pension funds have theobligation to early exercise the option if an underfunding occurs, whereas the bearer of anAmerican put has the right to exercise the option. This difference has major consequences forthe valuation. The main result of the paper is that...