Dert, C. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics) Lodewijk, M. Oldenkamp, B.
Abstract
With the population in the U.S. and other countries ageing rapidly, the burden of future pension liabilities is ever increasing. In recent years, governments and companies have become much more aware of the inherent risks that are involved. As a consequence, there is a worldwide tendency to shift from defined benefit pension plans to defined contribution plans. The implications for employees are far-reaching: under a defined contribution plan, the employee bears the investment risk: the level of his pension depends on the return on his investments. Under a defined benefit system, the level of pensions is fixed and the sponsor (in many cases the employer) bears the investment risk: the premiums required to fund the pension depend on the return on investments. In this joumal, Bodie and Crane (1999) (BC) recognize that the transfer of investment risk from employer to employee calls for easy-to-implement investment strategies that correctly reflect the trade-off between the risk of a poor pension and the joy of a sumptuous pension. They compare investments in traditional equity and bonds with investments in TIPS (inflation linked bonds) and equity with a protective floor. Their results suggest that a series of investments in a product with a protective floor have a much higher chance of reaching a specified retirement income level than investments in a mixture of equity and fixed income securities.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number
0033.