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Market Valuation, Pension Fund Policy and Contribution Volatility

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Author Info
Maarten van Rooij
Arjen Siegmann
Peter Vlaar

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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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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 159.

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Date of creation: Dec 2007
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Handle: RePEc:dnb:dnbwpp:159

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Web page: http://www.dnb.nl/en/
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Related research
Keywords: defined benefit pension funds; fair value versus actuarial discounting; Monte Carlo simulation; asset and liability management; pension liabilities; conditional indexation;

Other versions of this item:

Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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  1. 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. [Downloadable!]
  2. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department. [Downloadable!]
  3. van Rooij, Maarten C.J. & Kool, Clemens J.M. & Prast, Henriette M., 2007. "Risk-return preferences in the pension domain: Are people able to choose?," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 701-722, April. [Downloadable!] (restricted)
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  4. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department. [Downloadable!]
  5. 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," MEB Series (discontinued) 2003-18, Netherlands Central Bank, Monetary and Economic Policy Department. [Downloadable!]
    Other versions:
  6. Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department. [Downloadable!]
  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. [Downloadable!] (restricted)
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