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Conditional Indexation in Defined Benefit Pension Plans in the Netherlands*

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  • Jacob A Bikker

    ()
    (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, Amsterdam, 1000 AB, The Netherlands.)

  • Peter J G Vlaar

    ()
    (De Nederlandsche Bank (DNB), Economics and Research Division, Financial Research Department, P.O. Box 98, Amsterdam, 1000 AB, The Netherlands.)

Abstract

In an ageing society, defined benefit (DB) pension plans are increasingly difficult to manage by means of contribution policy only, as the contribution base is likely to shrink relative to total pension provisions. This development, together with an increased emphasis on market valuation in regulatory and accounting rules, has led to a switch of DB plans to defined contribution plans throughout the world. In the Netherlands, a different solution has been sought. The typical pension contract nowadays comprises an average earnings DB pension in which only nominal benefits are guaranteed, but with the intention to provide wage or price indexation. In the new supervisory regime, the guaranteed pension rights, based on market valuation, are subject to risk-based solvency requirements. Provisioning is not required for conditional pension rights, although contributions have to be consistent with the indexation ambition. In this paper, we analyse to what extent indexation is indeed likely, given various indexation and contribution policies. Simulations show that voluntary provisioning for indexation is to be recommended. Fully guaranteed indexation is virtually unaffordable under the new supervisory regime, because the real discount rate is generally both very low and highly volatile. The Geneva Papers (2007) 32, 494–515. doi:10.1057/palgrave.gpp.2510140

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

Volume (Year): 32 (2007)
Issue (Month): 4 (October)
Pages: 494-515

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Handle: RePEc:pal:gpprii:v:32:y:2007:i:4:p:494-515

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Cited by:
  1. Dirk Broeders & Paul Hilbers & David Rijsbergen, 2013. "What drives pension indexation in turbulent times? An empirical examination of Dutch pension funds," DNB Working Papers 368, Netherlands Central Bank, Research Department.
  2. 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.
  3. Broeders, Dirk & Chen, An, 2010. "Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1201-1214, June.

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