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What drives pension indexation in turbulent times? An empirical examination of Dutch pension funds

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  • Dirk Broeders
  • Paul Hilbers
  • David Rijsbergen
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    Abstract

    This paper identifies the key factors driving indexation in turbulent economic times within defined benefit plans using a unique panel dataset of 166 Dutch pension funds from 2007 to 2010. Key drivers of indexation are the funding ratio, inflation and real wage growth. The type of pension fund and the interest rate exposure are also statistically significant, although the latter effect is nonlinear. The asset allocation has no significant effect on the level of provided indexation as this is already captured by the funding ratio. We also examine the relation between policy ladders and the actual level of provided indexation. This study finds that a policy ladder with an upper limit equal to a 100 percent real funding ratio is able to predict the actual level of indexation more accurately than a ladder with an upper limit based on a pension fund's required funding ratio.

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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 368.

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    Date of creation: Jan 2013
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    Handle: RePEc:dnb:dnbwpp:368

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    Keywords: Indexation; policy ladders; defined benefit plans;

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    1. Roel M. W. J. Beetsma & Alessandro Bucciol, 2010. "Differentiating Indexation in Dutch Pension Funds," CESifo Working Paper Series 3305, CESifo Group Munich.
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    3. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    4. Ponds, E.H.M. & Riel, B. van, 2007. "Sharing Risk: The Netherlands' New Approach to Pensions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-387569, Tilburg University.
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    12. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, October.
    13. Jacob A. Bikker & Dirk W.G.A. Broeders & David A. Hollanders & Eduard H.M. Ponds, 2009. "Pension funds' asset allocation and participant age: a test of the life-cycle model," DNB Working Papers 223, Netherlands Central Bank, Research Department.
    14. Robert C. Merton, 1982. "On Consumption-Indexed Public Pension Plans," NBER Working Papers 0910, National Bureau of Economic Research, Inc.
    15. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
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    17. Gordon L Clark & Paul Bennett, 2001. "Dutch sector-wide supplementary pensions: fund governance, European competition policy, and the geography of finance," Environment and Planning A, Pion Ltd, London, vol. 33(1), pages 27-48, January.
    18. 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.
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    20. Ponds, Eduard H. M. & Riel, Bart Van, 2009. "Sharing risk: the Netherlands' new approach to pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(01), pages 91-105, January.
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