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 InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 159.
Date of creation: Dec 2007
Date of revision:
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:
- Maarten Rooij & Arjen Siegmann & Peter Vlaar, 2008. "Market Valuation, Pension Fund Policy and Contribution Volatility," De Economist, Springer, vol. 156(1), pages 73-93, March.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-CMP-2008-01-05 (Computational Economics)
- NEP-KNM-2008-01-05 (Knowledge Management & Knowledge Economy)
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.:
- Rooij, M.C.J. van & Kool, C.J.M. & Prast, H.M., 2007.
"Risk-return preferences in the pension domain: Are people able to choose?,"
Open Access publications from Tilburg University
urn:nbn:nl:ui:12-381463, Tilburg University.
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- Maarten van Rooij & Clemens Kool & Henri�tte Prast, 2005. "Risk-return preferences in the pension domain: are people able to choose?," DNB Working Papers 025, Netherlands Central Bank, Research Department.
- M.C.J. van Rooij & C.J.M. Kool & H.M. Prast, 2005. "Risk-return preferences in the pension domain: are people able to choose?," Working Papers 05-04, Utrecht School of Economics.
- Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
- 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,"
WO Research Memoranda (discontinued)
752, Netherlands Central Bank, Research Department.
- 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.
- Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
- Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
- 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.
- 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.
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