Minimum Funding Ratios for Defined-Benefit Pension Funds
AbstractWe compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC-scheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DC-scheme is constrained to a fixed-contribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%-point higher contribution to achieve equal expected utility.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 180.
Date of creation: Sep 2008
Date of revision:
defined-benefit pension fund; individual efficiency; defined-contribution;
Other versions of this item:
- Siegmann, Arjen, 2011. "Minimum funding ratios for defined-benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(03), pages 417-434, July.
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-28 (All new papers)
- NEP-IAS-2008-10-28 (Insurance Economics)
- NEP-MAC-2008-10-28 (Macroeconomics)
- NEP-RMG-2008-10-28 (Risk Management)
- NEP-UPT-2008-10-28 (Utility Models & Prospect Theory)
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.:
- Boender, Guus C. E., 1997. "A hybrid simulation/optimisation scenario model for asset/liability management," European Journal of Operational Research, Elsevier, vol. 99(1), pages 126-135, May.
- 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.
- 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.
- 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.
- Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988.
"Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?,"
in: Pensions in the U.S. Economy, pages 139-162
National Bureau of Economic Research, Inc.
- Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1985. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs?," NBER Working Papers 1719, National Bureau of Economic Research, Inc.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Benartzi, Shlomo & Thaler, Richard H, 1995.
"Myopic Loss Aversion and the Equity Premium Puzzle,"
The Quarterly Journal of Economics,
MIT Press, vol. 110(1), pages 73-92, February.
- Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
- Gollier, Christian, 2008.
"Intergenerational risk-sharing and risk-taking of a pension fund,"
Journal of Public Economics,
Elsevier, vol. 92(5-6), pages 1463-1485, June.
- Christian Gollier, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," CESifo Working Paper Series 1969, CESifo Group Munich.
- Gollier, Christian, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," IDEI Working Papers 42, Institut d'Économie Industrielle (IDEI), Toulouse.
- Siegmann, Arjen, 2007.
"Optimal investment policies for defined benefit pension funds,"
Journal of Pension Economics and Finance,
Cambridge University Press, vol. 6(01), pages 1-20, March.
- Arjen Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," DNB Staff Reports (discontinued) 112, Netherlands Central Bank.
- A.H. Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," WO Research Memoranda (discontinued) 728, Netherlands Central Bank, Research Department.
- Besley, Timothy J. & Prat, Andrea, 2003.
"Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans,"
CEPR Discussion Papers
3955, C.E.P.R. Discussion Papers.
- Timothy Besley & Andrea Prat, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," LSE Research Online Documents on Economics 24853, London School of Economics and Political Science, LSE Library.
- Tim Besley & Andrea Prat, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," IFS Working Papers W03/09, Institute for Fiscal Studies.
- Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
- Andrew A. Samwick & Jonathan Skinner, 2004. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, American Economic Association, vol. 94(1), pages 329-343, March.
- Pierre‐André Chiappori & Monica Paiella, 2011.
"Relative Risk Aversion Is Constant: Evidence From Panel Data,"
Journal of the European Economic Association,
European Economic Association, vol. 9(6), pages 1021-1052, December.
- Pierre-André Chiappori & Monica Paiella, 2008. "Relative Risk Aversion Is Constant: Evidence from Panel Data," Discussion Papers 5_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Christian Gollier, 2005.
"Optimal Portfolio Management for Individual Pension Plans,"
CESifo Working Paper Series
1394, CESifo Group Munich.
- Gollier, Christian, 2005. "Optimal Portfolio Management for Individual Pension Plans," IDEI Working Papers 298, Institut d'Économie Industrielle (IDEI), Toulouse.
- Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006 169, Money Macro and Finance Research Group.
- Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(01), pages 1-29, January.
- Dalal, Ardeshir J & Arshanapalli, Bala G, 1993. " Estimating the Demand for Risky Assets via the Indirect Expected Utility Function," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 277-88, June.
- Eichhorst, Werner & Gerard, Maarten & Kendzia, Michael J. & Mayrhuber, Christine & Nielsen, Conny & Rünstler, Gerhard & Url, Thomas, 2011. "Report No. 42: Pension Systems in the EU – Contingent Liabilities and Assets in the Public and Private Sector," IZA Research Reports 42, Institute for the Study of Labor (IZA).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet).
If references are entirely missing, you can add them using this form.