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Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund

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  • Christian Gollier

Abstract

By using their financial reserves efficiently, pension funds can smooth shocks on 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 ratio 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. 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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1969.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1969

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Keywords: dynamic portfolio choice; pension; retirement; intergenerational risk sharing; financial intermediation;

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  1. Gottardi, Piero & Kubler, Felix, 2011. "Social security and risk sharing," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(3), pages 1078-1106, May.
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  16. Christian Gollier, 2005. "Optimal Portfolio Management for Individual Pension Plans," CESifo Working Paper Series 1394, CESifo Group Munich.
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Blog mentions

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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. Hippolyte d’Albis & Johanna Etner, 2013. "Illiquid Life Annuities," EconomiX Working Papers 2013-30, University of Paris West - Nanterre la Défense, EconomiX.
  2. Noël Bonneuil, 2013. "Early Warning to Insolvency in the Pension Fund: The French Case," Risks, MDPI, Open Access Journal, MDPI, Open Access Journal, vol. 1(1), pages 1-13, January.
  3. Bovenberg, A.L. & Ewijk, C. van, 2011. "Private pensions in Europe," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5234269, Tilburg University.
  4. Jan Bonenkamp, 2009. "Measuring Lifetime Redistribution in Dutch Occupational Pensions," De Economist, Springer, Springer, vol. 157(1), pages 49-77, March.
  5. Gabay, Daniel & Grasselli, Martino, 2012. "Fair demographic risk sharing in defined contribution pension systems," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(4), pages 657-669.
  6. J.A. Bikker & Dirk W. G. A Broeders & David A. Hollanders & Eduard H. M. Ponds, 2009. "Pension funds’ asset allocation and participant age: a test of the life-cycle model," Working Papers, Utrecht School of Economics 09-25, Utrecht School of Economics.
  7. 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.
  8. 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, Elsevier, vol. 56(6), pages 1310-1324.
  9. Arjen Siegmann, 2008. "Minimum Funding Ratios for Defined-Benefit Pension Funds," DNB Working Papers, Netherlands Central Bank, Research Department 180, Netherlands Central Bank, Research Department.
  10. 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.
  11. Beetsma, Roel & Romp, Ward E, 2013. "Participation Constraints in Pension Systems," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9656, C.E.P.R. Discussion Papers.
  12. Mehlkopf, R.J., 2011. "Risk sharing with the unborn," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-4960700, Tilburg University.
  13. 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.
  14. Goecke, Oskar, 2013. "Pension saving schemes with return smoothing mechanism," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 678-689.
  15. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(4), pages 191-210, Fall.
  16. 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.
  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, Board of Governors of the Federal Reserve System (U.S.) 2013-23, Board of Governors of the Federal Reserve System (U.S.).
  18. repec:dgr:uvatin:2011056 is not listed on IDEAS

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