TY  - JOUR
AU  - Lachance,Marie-Eve
AU  - Mitchell,Olivia S.
TI  - Guaranteeing Defined Contribution Pensions: The Option to Buy-Back a Defined Benefit Promise
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8731
PY  - 2002
Y2  - January 2002
UR  - http://www.nber.org/papers/w8731
L1  - http://www.nber.org/papers/w8731.pdf
N1  - Author contact info:
Marie-Eve Lachance
E-Mail: Marie.Lachance@sdsu.edu

Olivia S. Mitchell
University of Pennsylvania
Wharton School
3620 Locust Walk, St 3000 SH-DH
Philadelphia, PA 19104-6302
Tel: 215-898-0424
Fax: 215/898-0310
E-Mail: mitchelo@wharton.upenn.edu
AB  - After a long commitment to defined benefit (DB) pension plans for US public sect or employees, many state legislatures have introduced defined contribution (DC) plans for their public employees.  In this process, investment risk which was previously borne by state DB plans has now devolved to employees covered by the new DC plans. In light of this trend, some states have proposed a guarantee mechanism to help protect DC plan participants.  One such guarantee takes the form of an option permitting DC plan participants to bu y back their DB benefit for a price.  This paper develops a theoretical framewor k to analyze the option design and illustrate how employee characteristics influ ence the option's cost.  We illustrate the potential magnitude of a buy-back opt ion value enacted recently by the State of Florida for its public employees.  If employees were to exercise the buy-back option optimally, the market value of t his option could represent up to 100 percent of the DC contributions over the wo rklife.
ER  -