An assessment for a sustainable and generationally fair pension contract reform

Stephan van Stalborch

An assessment for a sustainable and generationally fair pension contract reform

This thesis examines a sustainable and generationally fair pension contract (reform). By means of a value-based ALM study, I indicate whether age cohorts gain or lose from a contract reform. I demonstrate that the current FTK pension contract ambition to safeguard a nominal pension while aspiring a real pension is not sustainable and fair across generations. First, for the current average funding position of the Dutch pension funds, the current FTK contract does not proportionally reward the elderly for the risks they are exposed to. Second, adjustments in the investment mix within the current FTK contract imply a signicant redistribution of value between age cohorts, caused by the asymmetric policy ladder. The advantage of a soft symmetric contract is that adjusting the investment mix will not lead to value transfers between the age cohorts. The value transfer from young to old, owing to a higher discount rate and a symmetric policy ladder, when switching from the current FTK to the soft symmetric pension contract can be minimized by an equalization reserve. I therefore propose the option either to ensure a hard nominal pension without mismatch risk or to switch to a soft pension contract. The cohorts who gain, and to what extent, if a soft real rather than a soft nominal pension contract is introduced, depends on the amortization period in relation to the duration of the nominal liabilities. Finally, fund characteristics as the funding ratio and indexation ambition contribute, in addition to the investment, buer and amortization policy, to the realization that the determination of one uniform applicable value transfer is hardly feasible. Notwithstanding the benets of a soft symmetric contract, I indicate that this proposed pension contract will, in comparison to the current contract, not improve the distribution of equity exposure over the age cohorts.



References[1] Auerbach, A.J., Gokhale, J., Kotliko, L.J. : Generational accounts- a meaningful alterna-tive to decit accounting, NBER Working Paper, Princeton University Press, New Jersey,2001[2] Black, F., Scholes, M.: The pricing of options and corporate bonds, Journal of PoliticalEconomy(81) 637-654, 1973[3] Bovenberg, A.L.: The life-course perspective and social policies: An overview of the issues,CESifo Economic Studies, Vol. 54, No.4, pp. 593-641, 2008[4] Bovenberg, A.L., Nijman, T.E., Werker, B.J.M.: Voorwaardelijke pensioenaanspraken: overwaarderen, beschermen, communiceren en beleggen, Netspar occasional paper, 2012a[5] Bovenberg, A.L., Kocken, T., Nijman, T.E., Oldenkamp, B., Potters, J., van Wijnbergen, S.,Werker, B.J.M.: De laatste loodjes voor de discontocurve, Netspar occasional paper, 2012b[6] Cui, J., De Jong, F., Ponds, E.H.M.: Intergenerational risk-sharing within funded pensionschemes, Journal of Pension Economics and Finance, 10(1), 1-29, 2011[7] Ewijk, C. van, Lever, M., Mehlkopf, R.J.: Generatie-eecten Pensioenakkoord, CPB notitie,Centraal Planbureau, 2012[8] Frijns, J., Nijssen, J., Scholtens, L.: Onzekere zekerheid, 2010[9] Gollier, C.: Intergenerational risk-sharing and risk-taking of a pension fund, Journal ofPublic Economics 92, 2008[10] Goudswaard, K., Nijman, T.E., Schnabel, P., Beetsma, R.: Een sterke tweede pijler, 2010[11] Hoekert, W.: De gevolgen voor de voorgestelde waarderingsmethodieken in FTK2, De Ac-tuaris, 18-6 2011[12] Hoevenaars, P.M.M., Pond, E.H.M.: Value of intergenerational transfers in funded collectivepension schemes, Insurance: Mathematics and Economics, vol 42/2, pp. 578-593, 2008[13] Jagannathan, R., Kocherlakota, N.R.: Why should older people invest less in stock thanyounger people?, Federal Reserve Bank of Minneapolis Quarterly Review, 20, pages 11-23,1996[14] Kocken, T.P.: De impact van een niet-risicovrije disconteringsvoet op de verdeling van eencollectief vermogen tussen generaties, Working paper, UvA, 2011a[15] Kocken, T.P.: Financiele contracten tussen generaties en de noodzaak van arbitragevrijewaardering, University of Amsterdam, 2011b[16] Lekniute, Z., Ponds, E.H.M.: Pensioenakkoord en eecten voor generaties, Netspar Discus-sion Paper, Vol. 08/2011-066, 2011[17] Merton, R.C.: Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case,Review of Economics and Statistics, Vol. 51, No. 3, p 247-257, 1969.[18] Ministry of Social Aairs and Employment, memorandum review nancial assessment frame-work, May 201250[19] Ponds, E.H.M. Pension funds and value-based generational accounting, Journal of PensionEconomics and Finance, 2003[20] Schumacher, J. Financial Models, Dictaat Financial Models, Tilburg University, 2008[21] Stichting van de Arbied(StAr): Uitwerkingsmemorandum Pensioenakkoord van 4 juni 2010,2011[22] Teulings, C., De Vries, C.G.: Generational accounting, solidarity and pension losses, DeEconomist 154 NO.1, 2006[23] Vasicek, O.: An equilibrium characterization of the term structure, Journal of FinancialEconomics(5), 177-188, 1977

Universiteit of Hogeschool
Quantitative Finance and Actuarial Sciences, Econometrics and Operational Research
Universiteit van Tilburg (Nederland, Noord-Brabant)
Share this on: