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Pension benefit security: a comparison of solvency requirements, a pension guarantee fund and sponsor support

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Author Info

  • Dirk Broeders
  • An Chen
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Abstract

Developed countries apply different security mechanisms in regulation to protect defined pension benefits: solvency requirements, a pension guarantee fund, and sponsor support. We test the performance of these mechanisms in terms of the protection offered to pension benefits in relation to the costs. For this, we calculate the expected log-return for the beneficiaries and the shortfall probability, i.e. the likelihood of the pension payment falling below the promised level. We show that it is possible to compare different pension security mechanisms using appropriate finance tools. Compared to a system based on solvency requirements alone, support by a pension guarantee fund or by the sponsor offers better downside protection for pension funds pursuing an aggressive investment policy. However, this comes at an additional cost. Beneficiaries of pension funds with conservative investment policies are better off under solvency requirements.

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File URL: http://www.dnb.nl/en/binaries/268%20-%20Pension%20benefit%20security_tcm47-243121.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 268.

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Date of creation: Dec 2010
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Handle: RePEc:dnb:dnbwpp:268

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Related research

Keywords: Pension plans; regulation; barrier options; rainbow barrier options; guarantee systems;

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References

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  1. Alan J. Marcus, 1983. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Working Papers 1217, National Bureau of Economic Research, Inc.
  2. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, October.
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Cited by:
  1. Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers 414, Netherlands Central Bank, Research Department.

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