Pricing pension plans based on average salary without early retirement: partial differential equation modeling and numerical solution

[Abstract] In this paper, a partial differential equation model for the pricing of pension plans based on average salary is posed by using the dynamic hedging methodology. The existence and uniqueness of solutions for the resulting initial-value problem associated with a Kolmogorov equation is obtained. Moreover, a numerical method based on a Crank–Nicolson characteristics time discretization combined with finite elements to approximate the solution is proposed. Finally, some test examples illustrate the performance of the numerical methods as a tool for pricing these pension plans.

This paper was partly funded by MCINN (Project MTM2010–21135–C02-01) and by Xunta de Galicia (Project INCITE09105339PR and Ayuda CN2011/004, cofinanced with FEDER funds).

Xunta de Galicia; INCITE09105339PR

Xunta de Galicia; CN2011/004

Country

Spain

Related Organizations

University of A Coruña
Spain

Keywords

Pricing pension plans, Partial differential equation modeling

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