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Market Valuation, Pension Fund Policy and Contribution Volatility

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  • Maarten Rooij

    ()

  • Arjen Siegmann

    ()

  • Peter Vlaar

    ()

Abstract

Market valuation is becoming more and more popular, both in accounting and regulation, as well as in academic circles. For pension funds and their participants, the knowledge that market-valued pension liabilities can indeed be transferred to a third party, if necessary, is a great virtue. Using a simulation model, this paper demonstrates the implicit costs and benefits of using market valuation for a typical Dutch pension fund, which offers a guaranteed average pay nominal pension with conditional indexation. The impact turns out to be fairly small, if fixed discount rates are still used for conditional rights. However, if market valuation is used for both unconditional and conditional rights, contribution volatility increases significantly. A remedy is to increase the duration of assets considerably. It is not clear, though, whether this option is available for large pension funds given the limited supply of long-term bonds.

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Bibliographic Info

Article provided by Springer in its journal De Economist.

Volume (Year): 156 (2008)
Issue (Month): 1 (March)
Pages: 73-93

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Handle: RePEc:kap:decono:v:156:y:2008:i:1:p:73-93

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Web page: http://www.springerlink.com/link.asp?id=100260

Related research

Keywords: asset and liability management; conditional indexation; defined benefit pension funds; fair value versus actuarial discounting; Monte Carlo simulation; pension liabilities; G23; C15; C59; J18;

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  1. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
  2. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
  3. M.C.J. van Rooij & A.H. Siegmann & P.J.G. Vlaar, 2004. "Palmnet: A pension asset and liability model for the Netherlands," WO Research Memoranda (discontinued) 760, Netherlands Central Bank, Research Department.
  4. P.J.A. van Els & W.A. van den End & M.C.J. van Rooij, 2003. "Pensions and public opinion: a survey among dutch households," WO Research Memoranda (discontinued) 752, Netherlands Central Bank, Research Department.
  5. Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
  6. M.C.J. van Rooij & C.J.M. Kool & H.M. Prast, 2005. "Risk-return preferences in the pension domain: are people able to choose?," Working Papers 05-04, Utrecht School of Economics.
  7. de Jong, Frank, 2008. "Pension fund investments and the valuation of liabilities under conditional indexation," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 1-13, February.
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Cited by:
  1. Dirk Broeders & Paul Hilbers & David Rijsbergen & Ningli Shen, 2014. "What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds," De Economist, Springer, vol. 162(1), pages 41-70, March.

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