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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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    16. Robert C. Merton, 1983. "On Consumption Indexed Public Pension Plans," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 259-290 National Bureau of Economic Research, Inc.
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    19. Jacob Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," DNB Working Papers 376, Netherlands Central Bank, Research Department.
    20. Veall, Michael R & Zimmermann, Klaus F, 1994. "Goodness of Fit Measures in the Tobit Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(4), pages 485-99, November.
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