Market Valuation, Pension Fund Policy and Contribution Volatility
AbstractMarket 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 InfoArticle provided by Springer in its journal De Economist.
Volume (Year): 156 (2008)
Issue (Month): 1 (March)
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Web page: http://www.springerlink.com/link.asp?id=100260
asset and liability management; conditional indexation; defined benefit pension funds; fair value versus actuarial discounting; Monte Carlo simulation; pension liabilities; G23; C15; C59; J18;
Other versions of this item:
- Maarten van Rooij & Arjen Siegmann & Peter Vlaar, 2007. "Market Valuation, Pension Fund Policy and Contribution Volatility," DNB Working Papers 159, Netherlands Central Bank, Research Department.
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
- J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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