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Intergenerational risk-sharing and risk-taking of a pension fund

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  • Gollier, Christian

Abstract

By using their financial reserves efficiently, pension funds can smooth shocks on their asset returns, and can thus facilitate intergenerational risk-sharing. In addition to the primary benefit of improved time-diversification, this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium, which also favors the consumers. In this paper, our aim is twofold. First, we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management, capital payments to retirees, and dividend payments to shareholders. We examine both the first-best rules and the second-best rules, where, in the latter case, the fund is constrained by a solvency constraint and by a guaranteed minimum return to workers' contributions. Second, we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement. We estimate that the certainty equivalent return of the pension saving scheme goes from 3.23% per year to 3.76% when intergenerational risk-sharing is introduced. One of the main results of the paper is that better intergenerational risk-sharing does not reduce the risk born by each generation. Rather, it increases the expected return to the workers' contributions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 5-6 (June)
Pages: 1463-1485

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:5-6:p:1463-1485

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. De economie van Poolexpedities
    by Thijs in eco.nomie.nl on 2009-09-16 12:42:23
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Cited by:
  1. Goecke, Oskar, 2013. "Pension saving schemes with return smoothing mechanism," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 678-689.
  2. Jacob A. Bikker & Dirk W. G. A. Broeders & David A. Hollanders & Eduard H. M. Ponds, 2012. "Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 595-618, 09.
  3. Beetsma, Roel & Romp, Ward E, 2013. "Participation Constraints in Pension Systems," CEPR Discussion Papers 9656, C.E.P.R. Discussion Papers.
  4. repec:dgr:uvatin:2011056 is not listed on IDEAS
  5. Beetsma, Roel M.W.J. & Romp, Ward E. & Vos, Siert J., 2012. "Voluntary participation and intergenerational risk sharing in a funded pension system," European Economic Review, Elsevier, vol. 56(6), pages 1310-1324.
  6. Jan Bonenkamp, 2009. "Measuring Lifetime Redistribution in Dutch Occupational Pensions," De Economist, Springer, vol. 157(1), pages 49-77, March.
  7. Damiaan H.J. Chen & Roel Beetsma & Eduard Ponds & Ward E. Romp, 2014. "Intergenerational Risk-Sharing through Funded Pensions and Public Debt," CESifo Working Paper Series 4624, CESifo Group Munich.
  8. Gabay, Daniel & Grasselli, Martino, 2012. "Fair demographic risk sharing in defined contribution pension systems," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 657-669.
  9. Noël Bonneuil, 2013. "Early Warning to Insolvency in the Pension Fund: The French Case," Risks, MDPI, Open Access Journal, vol. 1(1), pages 1-13, January.
  10. d'Albis, Hippolyte & Etner, Johanna, 2013. "Illiquid Life Annuities," MPRA Paper 50751, University Library of Munich, Germany.
  11. Arjen Siegmann, 2008. "Minimum Funding Ratios for Defined-Benefit Pension Funds," DNB Working Papers 180, Netherlands Central Bank, Research Department.
  12. Bovenberg, A.L. & Ewijk, C. van, 2011. "Private pensions in Europe," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5234269, Tilburg University.
  13. Broeders, Dirk & Chen, An & Koos, Birgit, 2011. "A utility-based comparison of pension funds and life insurance companies under regulatory constraints," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 1-10, July.
  14. Mehlkopf, R.J., 2011. "Risk sharing with the unborn," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4960700, Tilburg University.
  15. Hoevenaars, Roy P.M.M. & Ponds, Eduard H.M., 2008. "Valuation of intergenerational transfers in funded collective pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 578-593, April.
  16. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
  17. Javed I. Ahmed & Brad M. Barber & Terrance Odean, 2013. "Made poorer by choice: worker outcomes in Social Security v. private retirement accounts," Finance and Economics Discussion Series 2013-23, Board of Governors of the Federal Reserve System (U.S.).
  18. Lijian Wang & Daniel Béland, 2014. "Assessing the Financial Sustainability of China’s Rural Pension System," Sustainability, MDPI, Open Access Journal, vol. 6(6), pages 3271-3290, May.

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